Table of Contents
How to get a personal loan with low interest rates
Banks, credit unions, and online lenders offer low-interest personal loans to creditworthy clients. They provide reasonable annual percentage rates (APRs), which are usually lower than the national average personal loan rate of 12.35 percent as of September 11, 2024.
Unlike other personal loans, you would most likely need to go much beyond the lender’s minimum requirements to qualify for these cheap rates. This may include:
- A FICO credit score higher than 740 (or 800 for the lowest prices).
- An annual revenue that exceeds a specified yearly criterion.
- A clean credit history.
- An established credit history.
How to Get Low-Interest Personal Loans
While each lender’s standards and minimum requirements vary, following these seven steps can boost your chances of being approved for a low-interest personal loan.
An excellent credit score increases your chances of earning a low interest rate on a personal loan. Before applying, verify your credit report to confirm that your score is in good form and that there are no errors that would harm your credit.
1. Know your credit score.
Visit AnnualCreditReport.com to get a free copy of your reports once a week from all three credit bureaus (Equifax, Experian, and TransUnion). If there are no errors on your report but your score may be improved, try to bring any past-due accounts current while continuing to make regular payments on all of your other accounts. Refraining from applying for new credit is also vital because each hard credit inquiry lowers your credit score by a few points.
2. Pay down debts.
When you apply for a loan or any other credit product, lenders will consider your debt-to-income (DTI) ratio to evaluate whether you can make the monthly payment. To determine your DTI, tally up all of the monthly debts on your credit report — including credit cards, loans, and other regular debts — and divide by your total monthly income. Your DTI is the ultimate value, stated in percentages.
In general, and especially with low-interest loans, the higher your DTI, the higher your rates and the less likely you are to be approved. Most lenders want DTIs below 36 percent. However, yours will most likely have to be lower in order to get the best rates. If your debt-to-income ratio is greater than or approaching 36 percent, try some of the following strategies to help you manage your debt better.
Ways to Lower Your DTI
Follow debt-repayment measures. The debt snowball and debt avalanche approaches are suitable for people who earn a consistent income but have overwhelming monthly debt. Both require you to make the minimum payment on all of your debts, but the snowball technique prioritizes the smaller debts, whilst the avalanche method prioritizes the loans with the highest rates.
Debt counseling. Credit counseling is an excellent choice for those who do not know where to begin. Nonprofit groups, banks, and even churches provide credit counseling, often for free. You will be partnered with a credit counselor who will examine your financial condition. They will then walk you through possible options and ways to get relief. Some counselors can even help you negotiate debts with creditors.
3. Research all of your alternatives.
Personal loans are not a one-size-fits-all commodity; each lender has something unique to offer. Prequalify for at least two loans before settling on the first one that appears to be suitable. Prequalifying allows you to preview the rates you may receive after filing a formal application, but it does not guarantee approval.
However, not all lenders provide prequalification. If you come across a loan that appears to match your requirements, look into the details and rates to confirm it is competitive for your credit profile.
Examine the customer service department’s hours and customer feedback. Ensure that you will receive the necessary help during the application and repayment procedure.
If you are unsure where to begin and are feeling overwhelmed, consider your options. You can check out.
Online lenders.
- Banks can be both local and national.
- Credit unions exist both locally and nationally.
- Online marketplaces, such as Bankrate.
4. Check for discounts.
If you currently qualify for the lowest rate offered by the lender, check to see if there are any extra rate cuts available. These discounts typically range from 0.25 percent to 0.50 percent of your rate.
The autopay discount is the most prevalent discount offered by lenders. Some lenders additionally provide discounts for applying with an eligible co-borrower, having another sort of account with them, or owning retirement assets.
Also, contact your bank or credit union. Some provide fee discounts or advantages to existing customers. You may also be offered additional benefits, such as a longer grace period or the chance to adjust your monthly due date.
It is possible that you will be accepted for more than you expected. However, you should only borrow what you actually need. This allows you to have a more manageable monthly expense than if you borrowed a larger sum.
5. Apply for only the amount you need.
Before applying, crunch the numbers and review the lender’s terms and conditions page for any fees. While some lenders may remove or reduce fees for those with excellent credit, be aware of origination, prepayment, and late fees.
6. Consider credit unions.
Credit unions are nonprofit organizations that provide banking services to their members. They frequently provide lower personal loan rates than traditional banks.
To work for a credit union, you must first apply for membership. While some, such as PenFed, may have lower qualification requirements, others may limit membership to people who work for a specific employer, are linked with a specific organization, or live in a specific location.
Some credit unions also provide membership to relatives of current members. Each credit union is unique, so research all of your local possibilities before applying to ensure that you satisfy the minimum standards.
7. Apply for prequalification.
Most lenders allow applicants to examine their rates through prequalification before applying for a loan. For this phase, you must submit your contact information, projected gross income, date of birth, and Social Security number.
The best aspect of prequalifying for a loan is that you will know exactly what you are eligible for with that particular lender without jeopardizing your credit, as lenders only need to perform a light pull for this stage. Prequalify with at least three lenders to obtain a good idea of what you might qualify for.
How Personal Loan Interest Rates Work
Lenders consider various variables when determining if you are eligible for a low-interest personal loan, including your credit score, work status, and debt-to-income ratio.
Your credit score is important since it informs lenders about how successfully you have previously managed your loans and other financial items. The FICO score, which many lenders and creditors use to make lending decisions, ranges from 300 to 850. The lowest rates are often held for customers with great credit scores of above 800, as the chance of defaulting on payments is reduced.
You can still get approved with a lower credit score, but it will be more challenging. You can also expect higher interest rates and other costs.
The average personal loan interest rate for borrowers with great credit is between 10.73 percent and 12.5%. However, if your credit score is considered typical (630 to 689), the average cost is between 17.8 percent and 19.9 percent.
What to consider when comparing low-interest personal loans
After you have learned how interest rates on personal loans operate and what most lenders want, the next step is to shop around for the cheapest price.
Interest and fees. Look for the lowest starting interest rate and see whether there are any origination, underwriting, or early repayment costs.
Loan terms. A selection of terms can help you plan your monthly budget as well as the amount of interest you pay altogether. If you can afford the monthly payment for a shorter-term loan, the lender may offer you a cheaper interest rate.
Online prequalification. Getting prequalified can let you shop around and avoid formal applications with lenders who are not a suitable fit.
Customer service. Customer support available 24 hours a day, seven days a week, third-party ratings, and the sorts of customer service provided may all determine whether the lender is a good fit. Consider whether there are any branches available if you prefer in-person support.
Lenders offer incentives. Referral bonuses, lower interest rates for enrolling in automatic payments, free access to your credit score, and unemployment insurance may all have an impact on the entire borrowing experience.
The bottom line
A strong credit score, stable income, and a low debt-to-income ratio are essential for obtaining a low-interest personal loan. However, if your finances are not in good shape, consider taking a step back to raise your credit score and reduce your use rate before applying.
If you cannot wait and need the money right away, consider applying with a co-signer or signing up for an autopay discount to receive a better price. Most essential, look for the finest low-interest personal loan for your credit circumstances, prequalify wherever possible, and weigh your alternatives before taking out a loan.
