Best Personal Loan Interest Rates

The annoying thing about finance is that you don’t get to see the exact interest rate you’re offered until after you apply for the loan. This is a problem because each time you apply for a loan, it gets recorded on your credit report. If you end up applying for too many loans, it can have a seriously negative impact on your credit report. For this reason, you have to do your own research about personal loan rates – it’s too risky just to apply to see what rate you are offered.

This guide will provide you with all the information you need to determine the best way to approach personal loan interest rates. If you find the subject confusing, this will be a great way to educate yourself on the topic. Make sure to read through all the information provided to ensure that you have as much expertise as possible!

Why Are Interest Rates Important?

If you’ve been researching loans, you’ve probably found it hard to escape the subject of interest rates. They’re an extremely important component of any form of finance, so you need to make sure you understand why they’re so crucial to any loan that you end up receiving.

Interest rates look small on paper — they may only differ by a few percentages. But this is actually an extremely large amount when you consider how much it can add up. For example, just a few percentage points of difference in interest rates for a mortgage can end up resulting in hundreds of thousands of dollars extra being paid.

People often default on their mortgages or loans because of a change in interest rates. It’s extremely important that you understand the potential repercussions.

Interest rates are set by the federal government to help determine how much investment occurs in the economy. If the economy is going well, interest rates are increased to encourage people to save money. If the economy is going poorly, interest rates are decreased so that people can afford to borrow money and invest. Regardless, as a borrower, you are exposed to market forces that will determine how the government sets their interest rates. You need to be aware of how quickly things can change.

Type of Interest Rates

Something you may not know is that there are two primary types of interest rates. The two different types play a huge role in the way that your loan is structured, so it’s very important to have a firm grasp on the concepts behind them.

Fixed

This is the most common form of interest rate when you apply for a personal loan. Because personal loans are typically quite short-term, lenders are able to guarantee the same interest rate across the life of the loan. A fixed interest rate is simply an interest rate that doesn’t change. It’s the best form of interest rate for people who want to know exactly how much their payments will be throughout the life of their loan.

Variable

Variable interest rates on the other hand are much different. They change throughout the course of the loan as the lending environment changes. In some ways, this can be good for borrowers. If national interest rates drop, you will end up with a significant advantage. On the other hand, if they raise, you might end up finding out you can’t afford your loan. This is why this form of personal loan rate is considered the riskiest.

Mixed

In some instances, you can actually have a mix of the two interest rates. For example, your lender might offer you a fixed interest period for the first year of the loan, after which it may switch to a variable rate. Again, this is risker than just having a regular fixed interest rate.

What Determines My Interest Rates?

The question you most likely want the answer to is: what determines your interest rates? As a borrower, it’s useful to know the different components of how your interest rate is decided. We will explore all the different components in more detail below.

Lending Environment

As mentioned earlier in this guide, the lending environment is one thing that determines your interest rates. The government dictates interest rates to help determine the levels of saving and investment in the economy. This is one component that you will not be able to impact. Currently, we are seeing extremely low interest rates, which is good for those who want to borrow money, and bad for those who want to save.

Credit Score

The other big factor that will determine your interest rate is the credit score that you have. The better your credit score is, the more likely you will be able to get a good interest rate. Lenders consider your credit score the most important component of indicating how good of a borrower you will be. That’s why it’s important to make sure that you have as good of a credit score as possible.

There will be substantial difference in the personal loan rates you are offered, depending on your credit score. That’s why we always suggest that our readers know what their score is prior to applying for any personal loans.

Type of Loan

There are two primary types of loan that are available to those who want to get personal loans: secured and unsecured. Secured loans are loans that are attached to value of an asset, such as a house or a car. Unsecured loans are loans that aren’t attached to any asset. This means that if you default on a secured loan, you will end up getting your assets seized. On the other hand, if you default on an unsecured loan, the only damage you will see will be to your credit score.

Obviously, unsecured loans are much riskier for the lender, hence why they have much higher interest rates. Secured loans are best for those who want to have the lowest interest rates possible. If you’re worried about your ability to handle a high interest rate, you might want to secure the loan.

Loan Duration

The longer your loan is, the higher the interest rate might be. This may seem odd, but it’s because lenders understand that your financial situation can change over time. There’s a much higher chance that something happens to your ability to pay back the loan if you have a long-term loan. If you want to increase your chances of having a low interest rate, you’re best to make sure you get as short of a loan as possible.

Remember, the shorter the duration of your loan is, the higher the payments will be. This will also mean that you pay off the loan using less interest, as you won’t be accumulating interest over a prolonged period of time.

Shop Around

The first thing that you should do is shop around. You need to be looking at which lenders provide the best personal loan rates. As mentioned previously, you won’t be able to find the exact rate on offer until you apply, so you should make sure to ask the lender for a range. Most lenders will advertise their ranges quite openly, but if they don’t, you can call up their customer service team.

Try and make a list of the lenders with the best rates, and then look for other attributes that distinguish them. Affordability is a good starting point.

Consider Shortening Your Loan

You should consider shortening the loan that you currently have on offer. You want to make sure that you give your lender as many reasons as possible to provide you with a good rate. As mentioned previously, loan length is one of the major factors contributing to the interest rates that you will be offered by lenders. It’s important to make sure that you take this component seriously.

At the same time, you shouldn’t shorten your loan to the point of where you will struggle to make payments. Make sure to remember that you need to be certain you can meet payments.

Secure the Loan

Again, secure loans are much more likely to be offered low interest rates. You should make sure to consider securing the loan if you don’t believe you will be able to afford high interest rates. Securing the loan comes with its own risks, and many online lenders don’t offer secured loans, but if you do find a lender that provides them, they tend to be much more affordable.

Repair Your Credit Score

You can contact a credit repair company to help you improve your credit score. Many credit repair companies have exhibited success helping people improve their credit scores in a matter of months. It’s a great way to make sure that you have a good score entering the application phase. Keep in mind that many people have mistakes on their credit reports that can be fixed. Make sure to work with a credit repair company that only makes you pay for results. You don’t want to pay for a subscription service that doesn’t function properly.

Pay Off Your Credit Card

If you have some money to pay off your credit card balances, this can be another way to improve your score prior to your application. This will greatly reduce the interest rate that you are offered by lenders. Your credit score only uses the last stated balance to determine your score, so you can quickly improve it if you pay a significant portion of your balance off.

Get Someone to Co-Sign Your Loan

Getting a co-signer is another way to make sure that you don’t have to pay as much interest. Co-signers are people who guarantee your loan to help you get approved for financing. If your co-signer has a good credit score, they may help you get a lower interest rate. But remember, if you default on the loan, your co-signer will be responsible for paying it.

Watch Out for Fees

While interest rates are typically the highest costs associated with loans, you still need to look out for other fees and charges. You don’t want to fall prey to a catchy interest rate and then find out that fees make it almost more expensive than competitors. Ask your lender for a full breakdown of the cost of the loan. There should be a total price – this is the best way to assess which loan is the best deal.

Verdict

After reading this article, you should have a firm understanding of how important personal loan rates are. You don’t want to underestimate how much money you can save by ensuring you get the lowest rate possible. Take the entire process seriously – you’ll find that it’s very rewarding.

If you’re having trouble finding out where to start, we suggest you look out for our recommended lenders. We provide non-biased suggestions to our readers to help you get on the right path. We want you to be able to work with lenders that you can trust. Some of these lenders have great personal loan interest rates.

Remember, choose a lender before you begin applying. Applying for multiple loans at once will result in you most likely being rejected. You don’t want to prolong the amount of time it takes you to get approved for a loan.