What Affects Your Personal Loan Rates?
If you’re considering a personal loan, you’re not alone. Over 20 million Americans have taken out personal loans as of 2019, according to Experian.
About Personal Loans
A personal loan is an interest rate loan in which you borrow a fixed amount. You repay the loan in monthly installments that include principal and interest.
How much can you and I borrow? Personal loan amounts range from $1,500 to $50,000, although some people borrow twice that. You generally have 12 to 84 months to repay the full amount.
As with any loan, you and I should think carefully about how much we need to borrow. You will be making monthly payments that include interest. The more you borrow, the higher your monthly obligation, even at an attractive interest rate. Make sure you fully understand personal loans so that you can choose wisely for your needs.
How Can You Use Personal Loans?
Personal loans are a way for you and me to obtain funds for expenses not typically covered by other financing options such as car loans. Depending on your financial history, personal loans may offer a lower interest rate than credit cards or other alternatives.
You can make large purchases, such as house repairs, with a personal loan. Many homeowners rely on an equity loan or line of credit to fund home improvements. Still, there may be occasions when you would prefer not to use your property as collateral.
You can use personal loans for urgent expenses, such as medical bills or a major car repair. Other common reasons include wedding planning, travel to visit family, and veterinary bills. Since the loan is unsecured, you have discretion regarding how you use the funds.
Debt consolidation is a primary reason people take out personal loans. You and I know how easily payments can balloon for high-interest cards.
Suppose I am paying large monthly amounts on three credit card balances averaging 16% interest. I can obtain a personal loan at a lower interest rate, pay off those balances, and make one easy monthly payment instead.
Interest Rate Overview
Your personal loan interest rate dramatically affects how much you pay for borrowing the money. The difference is often thousands of dollars, even on a small loan.
According to Credit Karma, interest rates typically vary from 5% to 36%. What does this mean for you? Here’s an estimate of how much you would pay in interest for a $10,000 loan over five years at various rates.
- 5%: $1,323 total, $189 monthly
- 7%: $1,881 total, $198 monthly
- 10%: $2,748 total, $212 monthly
- 15%: $4,274 total, $238 monthly
- 20%: $5,896 total, $265 monthly
As you can see, it is to your advantage to shop for the best interest rate for which you can qualify.
You and I should understand how lenders set interest rates for personal loans. Significant factors include your credit score, the type of lender, and where you live. Let’s look at each of these.
Your Credit Score
Your credit score largely determines how low of an interest rate you qualify for. The higher your score, the better rate lenders will offer you.
For example, if I have an average credit score of 640, some lenders may deny my application on that alone. Approving lenders might offer rates of 16% and higher. However, if your credit score is 750, you might find rates between 7% and 9%.
Lenders typically use credit scores from the three credit bureaus: Experian, TransUnion, and Equifax. Rather than going in blind, you want to check your credit report before applying for loans. Knowing your score will help you evaluate your options.
You and I also want to check our credit reports regularly because mistakes and fraud happen. You should check all three bureau reports and report any inaccuracies.
You should be aware that prospective lenders typically conduct a hard credit inquiry when evaluating your loan application. Hard inquiries can lower your credit score slightly and may stay on your credit report for two years.
If you apply through a lender with whom you already have an account, the lender will make a soft credit inquiry. This action won’t affect your score.
Lender Interest Rates
The terms of an interest rate loan vary by type of lender. Typical lenders include credit unions, traditional banks, consumer finance companies, and internet lenders.
Credit unions usually offer among the lowest interest rates. Credit unions are member-owned banks with criteria for joining, such as working in a particular field or living in a given area. If you belong to one, you probably want to see what they can do for you.
Traditional banks such as Bank of America often offer personal loans. If you are an account holder, you may qualify for an interest rate discount or other concessions.
Consumer finance companies are non-banking lenders specializing in consumer business and personal loans. Their profits derive from interest payments, so their rates are often higher than those from banks. Some of these businesses target consumers with average to below-average financial histories who are willing to accept a higher interest rate to qualify for a personal loan.
There are many internet lenders out there, and anyone can put up a website. You and I want to verify that any online lenders we’re considering are legitimate. You can check these businesses with the Consumer Financial Protection Bureau or the Better Business Bureau.
Interest Rates by State
Believe it or not, which state you and I live in affects the interest rate we can obtain. If you live in West Virginia, you could pay over five percentage points higher than if you reside in Hawaii.
Here’s a sample of average interest rates for personal loans by state, according to S&P Global.
- Arizona: 10.01%
- California: 10.21%
- Florida: 9.23%
- Georgia: 8.81%
- Hawaii: 7.07%
- Kansas: 10.38%
- Maryland: 9.01
- New York: 8.72%
- Texas: 9.1%
- Virginia: 9.54%
- West Virginia: 11.39%
Personal Loans Versus Credit Cards
Depending on what you qualify for, personal loans may offer lower rates than credit cards.
According to the Federal Reserve, the average interest rate for a 24-month personal loan was 9.34% in August 2020. U.S. News puts the average credit card annual percentage rate range between 15% and 23%.
Other Personal Loan Fees
Your personal loan rate includes more than just the interest rate. The total amount above principal the loan will cost you is called the annual percentage rate (APR).
The law requires lenders to disclose both the interest rate and the APR for consumer loans. You and I should read loan disclosures carefully to understand the total credit cost. Some lenders charge a processing fee from 1% to 6% of the total amount. This charge is called an origination fee. Some lenders also assess a prepayment penalty if you pay off the loan early.
Are You Ready to Apply?
If you’re considering a personal loan, arm yourself with the basics to find your best options. Make sure you address these steps:
- Decide how much you need to borrow.
- Know what you can afford to pay every month.
- Check your credit score.
- Compare lender offers.
- Get lender preapproval.
A personal loan can be there when you need it, and obtaining the best interest rate will help you preserve your hard-earned income. Have you begun checking your personal loan rate? Please let us know your experience in the comments below.