Borrowing money can float you through tough times or finance long-awaited goals.
A loan’s APR, or annual percentage rate, represents your total borrowing cost.
Here’s what to know about personal loans, percentage rates, and what constitutes a “good” APR.
Borrowing money can float you through tough times or finance long-awaited goals. However, your financial dreams can derail quickly if your loan carries a high annual percentage rate, or APR. Here’s what to know about personal loans, percentage rates, and what constitutes a “good” APR.
Borrowing money can assist you through tough times or finance long-awaited goals.
What is a Personal Loan?
Personal loans are installment loans that you repay monthly with interest and additional fees. Unlike secured loans, you don't need collateral, which makes personal loans riskier for lenders, resulting in higher interest rates.
What is APR?
A loan’s APR, or annual percentage rate, represents your total borrowing cost. APRs are often listed on personal loans, credit cards, and mortgages.
To calculate your specific APR, lenders combine your interest rate plus loan-related fees, like origination fees. Then, they calculate the combined total as an average annual rate, written as a percentage of your loan amount. (E.g.: 5.5%, 7.2%, etc.)
What is a “Good” APR for Personal Loans?
Qualifying for a lower APR can mean big savings: the lower your rate, the less you’ll pay. However, personal loan rates vary dramatically by lender, loan length, and your own situation (income, credit score, etc.). That complicates determining a “good” APR, especially since rates range from 4-36%.
But as a general rule, a good APR sits lower than the current national average for your specific repayment term. For instance, the average APR on 2-year personal loans hit 12.17% in August 2023. (The national average varies based on the Federal Reserve’s federal funds rate. The higher the federal funds rate, the higher the average APR.)
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APR vs. Interest Rate
A loan’s interest rate only reflects the interest a lender charges to lend money. Meanwhile, APRs combine interest rates with other fees to accurately represent a loan’s cost. For that reason, APRs typically trend higher than interest rates. But your interest rate and APR may be the same if your lender doesn't charge fees.
How Does APR Work on a Personal Loan?
Most personal loans carry a fixed interest rate. That means your APR will be locked in for the life of your loan once you sign the loan contract. Your APR represents your total borrowing cost, making a handy comparison point for rate-shopping affordable loan estimates.
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Factors That Determine Your APR
Lenders rely on several factors to tailor APRs to individual applicants. Depending on your lender, these criteria may include:
- Their own criteria: Every lender sets internal restrictions that feed into interest rates, like minimum income requirements.
- The size of the loan: The more you borrow, the higher your APR may rise.
- Your income and employment history: Individuals with stable employment and/or higher incomes may be better positioned to repay their loans, leading to lower APRs.
- Your credit score: Lenders like to see good credit scores, which may correlate to more responsible borrowing. Generally, credit scores in the 750-850 range correspond to the best APRs.
- Your credit history: Lenders may pull your credit report to check for red flags like missed payments or bankruptcies. More (or more recent) negative marks may translate to higher APRs.
- Your debt-to-income (DTI) ratio: Your DTI tells lenders what percentage of your monthly income goes toward debts. The higher your DTI, the more risk you pose to lenders, and the higher your APR may jump.
- Your repayment timeline: Lenders view longer repayment timelines as riskier bets. Signing up for shorter repayment terms may lower your APR.
How to Qualify for the Lowest APR on Your Personal Loan
Everyone wants to pay the lowest interest rate possible. Even bad credit borrowers can take steps to seek lower APRs, like:
- Rate shopping: You can directly compare APRs to get the best deal by prequalifying with multiple lenders.
- Applying for no-fee personal loans: Mathematically, two ways to lower your APR are your interest rate or your fees. Applying for no- or low-fee personal loans may net you a more affordable APR.
- Shortening your loan term: Short-term loans may carry lower rates if you can afford higher monthly payments. Plus, you’ll save even more by making fewer interest payments.
- Taking out a secured loan: Personal loans don’t usually require collateral. However, if your lender does accept collateral – like a car title or savings account – you may qualify for a better APR.
How to Compare Personal Loans
One of the best ways to snag a great APR is to prequalify with several lenders and compare loans. You can ensure more accurate comparisons by applying for the same loan amount at every lender. Then, you can compare each lender’s:
- Interest Charges
- Overall APR
- Loan terms
- Monthly payment options
- Discount options (such as for opening a checking account or enrolling in autopay)
One lender may charge higher rates but lower fees, making them surprisingly cheaper. Or, a lower-rate loan could carry outrageous fees that increase your overall APR.
How to Qualify for a Better APR as a Less Ideal Candidate
We get it: life doesn’t always happen on your terms. Maybe you made a foolish financial mistake you’re still paying for. Or maybe you’re 18, with no credit file and needing a loan. It’s still possible to qualify for an affordable APR – it may take time and effort.
1. Apply with a Creditworthy Co-signer
If you need a personal loan now, applying with a cosigner may increase your approval odds and lower your APR. Ideally, you’ll want to choose a trusted friend or family member with a solid financial history. (Remember, it’s their credit score and income that will, hopefully, qualify you for a better deal.)
Your cosigner will also be responsible for repaying your personal loan. If you default later, you risk losing money and your relationship, so consider this option carefully!
2. Check Your Credit Report
Sometimes, borrowers with otherwise-solid financials receive surprisingly less-than-stellar loan offers. If that’s you, check your credit report for any negative marks in your file.
You might find a mistake, like a misreported payment or someone else’s financial information, dragging down your score. If that’s the case, you can dispute the mistake with the credit bureaus and have it removed.
Or, you may find a mark you’ve forgotten about, like a missed payment, that needs more time to fade.
3. Build Your Payment History
Since your credit score heavily influences your APR, keeping it as high as possible is important. One of the best ways to improve your credit is to make on-time payments consistently.
Building a good payment history requires credit usage and time for many borrowers. You may regularly use and pay off your credit cards or auto loans. You can also benefit from someone else’s good payment history by becoming an authorized user on their accounts.
Borrowers with poor credit histories might need more support to get back on track. For instance, you might open a secured credit card to start rebuilding your payment history with less risk to the lender. Credit-builder loans, often offered by credit unions, fulfill a similar role.
4. Add “Alternative Data” to Your Credit File
Some credit scoring companies, like Experian, also provide the option to incorporate alternative data in your credit report. These programs add regular payments, like your rent, utility, or streaming service payments, to your report to boost your score.
5. Pay Down Other Debts
You may also find that paying your current debts translates to better APR offers.
For instance, lowering your credit card balances lowers your utilization rate, which can boost your credit score. (Your utilization rate shows how much of your available credit you’re using. If you spend $100 on a credit card with a $1,000 limit, your utilization rate is 10%.) Ideally, lenders prefer a utilization rate below 30%.
Paying off other debts can also lower your DTI and prove you have the disposable income to afford another loan.
Everyone wants the lowest APR – but getting a “good” rate doesn’t happen overnight. It takes time, a solid payment history, the right lender, and economic circumstances. With responsible financial and debt management, you can work toward qualifying for the best rate.
Do personal loans hurt your credit score?
Taking out a personal loan can temporarily lower your credit score at first. That said, making on-time payments and increasing your credit mix both benefit your score long-term. However, missing a payment or default can substantially damage your score that lasts months or years.
What credit score is required for a personal loan?
Each lender sets its own minimum credit score requirements for personal loans. Some lenders only accept borrowers with scores better than 620, while “bad credit” lenders may go as low as 540-580. But remember: the lower your credit score, the lower your likely APR.
How do I get a better interest rate for a personal loan?
If you need cash now, putting up collateral or looping in a cosigner can increase your odds of qualifying for better rates. Alternatively, you can pay off your debts, increase your disposable income, and/or improve your credit score.