Personal loan interest rates can vary widely. Since they are the primary factor that influences how much you pay to borrow, it is important to get the lowest interest rates on personal loans.

However, few people fully understand what factors determine interest rates on a personal loan. Furthermore, most don’t understand which factors carry the most weight. Consequently, they may focus on improving some factors that really have little bearing on good personal loan interest rates in the USA.

Luckily, this article outlines the primary factors that can affect personal loan interest rates. It also describes which are commonly the most important and what you can do if you don’t rank well.

Defining Personal Loan Terms

First off, we’ll define the terms interest rate and APR so you understand the differences. Otherwise, you can’t accurately compare lender offers.

Interest Rate

Personal loan interest rates are expressed as percentages, such as 9% or 12%. Interest is the amount you pay to borrow.

Most personal loans today charge simple interest. Lenders calculate it by multiplying the amount you borrow (principal) by the interest rate and the length of the loan (term). Here’s a few examples that clearly show why personal loan interest rates matter:

Joe borrows $10,000 at 9% and chooses to repay his loan over 3 years

Interest paid would be $10,000 x 9% x 3 = $2,700

Mary borrows $10,000 at 14% and chooses to repay hew loan over 3 years

Interest paid would be $10,000 x 14% x 3 = $4,200

Annual Percentage Rate (APR)

A common term you will see when comparing lender rates is APR. This refers to how much you will pay in interest and personal loan fees. It is also expressed as a percentage rate.

Are additional fees a common thing when borrowing? Regrettably, yes. Some lenders do charge extra amounts such as an origination fee, which is calculated as a percentage of your loan amount. That can add up to a lot of money. Others slap you with a prepayment penalty if you pay off all or part of your personal loan off early.

Fortunately, some lenders offer fee-free personal loans, so your interest rates on personal loans are the same as the APR. Always compare the APR and interest rate to ensure you’re not paying more than you should.

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Now that you understand the difference between interest rates on personal loans and APRs, let’s look at the specific factors that can affect your interest rates.

1.   Lender

Contrary to what many people believe, your lender can be the most important factor that determines how much you pay in interest. That’s because lenders offer specific types of personal loans to attract certain borrowers. If you are their ideal customer, they are more likely to offer you the best possible interest rates.

For instance, mainstream lenders want the safest most reliable borrowers while alternative lenders are more accepting. You can get good interest rates through either, however mainstream lenders tend to be very strict so only their most valued customers enjoy good rates. Luckily, reputable alternative lenders are competitive and they may approve you even if you don’t meet traditional lender criteria.

Applying for loans online has become one of the fastest and easiest ways to compare interest rates on personal loans too, since you can often do so without affecting your credit scores. If mainstream lenders won’t offer you what you want, alternative lending is a good option.

2.   Credit Scores

If you’re wondering how to get a personal loan with low interest rates, certainly your credit scores play a significant role with many lenders. Consequently, you can’t go wrong if you improve your credit score. A high credit score indicates you are a reliable borrower which makes it more likely most lenders will grant you credit.

Nonetheless, there are lenders for borrowers of almost any credit score. Your credit scores won’t necessarily stop you from borrowing – they may just limit your offerings.

However, personal loan interest rates do reflect risk. Sub-prime borrowers can expect higher interest rates than those with good or excellent credit.

3.   Income

Borrowers with a steady stable income seldom have problems obtaining personal loans. They are also the most likely to enjoy the lowest interest rates on personal loans. But that doesn’t mean that others can’t borrow. They can if they choose the right type of loan and the right lender.

Some lenders consider income from alternative sources such as self-employment, pensions, disability, investments, and more. They may also have lower thresholds making it easier for individuals to qualify for low income personal loans.

Furthermore, alternative lenders can be a good choice since they tend to place less emphasis on stability. Conversely, mainstream lenders often want to see at least 24 months at the same job, bank, and residence.

4.   Debt-to-Income Ratio

Lenders want to know that you have enough money to comfortably repay a loan. As a result, they compare what you owe to what you earn. That is your debt-to-income ratio.

As an example, Betty’s gross income before deductions is $3,000 per month. She pays out $1,500 in debts each month. Her debt-to-income ratio is 50%.

The lower your debt-to-income ratio, the more likely a lender will offer you lower personal loan interest rates. If you are continually turned down for personal loans, paying down your debts can improve approval odds. Alternatively, you can apply for a smaller personal loan.

5.   Loan Principal

The amount you borrow, your loan principal, can affect your interest rate too. Higher amounts tend to have higher personal loan interest rates, since the lender’s risk is greater.

However, many lenders don’t offer large personal loans to higher risk individuals. Those with poor, fair, or credit often discover lenders cap their available loan amount.

Consequently, when you want to improve your chances of approval and want to enjoy lower interest rates on personal loans, one of your easiest options is to choose a lower principal amount.

6.   Repayment Term

The interest rates on personal loans also depend on the repayment terms chosen. Personal loans with longer terms tend to have higher interest rates than those with shorter ones.

Short term loans are usually defined as those with terms of between one and three years. Long term loans are usually defined as anything beyond three years, but most commonly they are those with terms or between five and seven years.

If you’re trying to get low personal loan interest rates, go for the shortest repayment term you can comfortably afford. In many ways, personal loans offer financial flexibility so you can align loan terms and payments with your lifestyle. Nonetheless, you shouldn’t choose a longer term than necessary, because your personal loan interest rate will be higher and you’ll pay more interest.

7.   Secured or Unsecured Personal Loan

Most personal loans are unsecured. In other words, they aren’t backed by an asset. However, secured personal loans aren’t necessarily an option you should ignore. Since these loans are guaranteed by assets, they have much lower interest rates.

The drawback of secured personal loans is that you could potentially forfeit your asset should you default on your loan. Even so, if you’re a responsible borrower a secured personal loan will almost certainly lead to lower interest rates.

8.   Prime Rate

This is a factor that is out of your control. The Federal Reserve is the central banking system in the U.S. which determines an interest rate based on what’s happening in the economy. There are also 12 Reserve Banks within the nation that respond to regional conditions.

When inflation is high, interest rates tend to rise to discourage borrowing. When inflation is low, interest rates drop to stimulate the economy and encourage borrowing.

The rate determined for the nation and each region are also the underlying factors lenders use to determine their own interest rates. They also rely on their own set of criteria to determine how much they charge borrowers based on certain risk factors.

Nonetheless, you can expect to pay higher interest rates on personal loans when the US prime rate rises. It is the base rate used by the majority of big lenders in the US. Smaller lenders tend to follow suit.

When the prime rate rises, so do personal loan interest rates. The only thing you can do is borrow at appropriate times through the best possible lender offering you the lowest personal loan interest rates.

Try FlexMoney’s Extensive Lender Network

As you have read, every lender offers something different. Additionally, even small variances between lenders can either save or cost you more money.

Obviously, it makes sense to check personal loan interest rates through as many lenders as possible to find the best possible personal loan. Luckily, that can be done easily when you use FlexMoney’s extensive lender network. We help borrowers discover what’s available to them quickly and easily.

Our huge network includes a wide variety of reputable lenders offering top-notch online loans. Fill out one application and we align you with your best possible options. It’s simple and the application process does not affect your credit scores. You could qualify for anything from a quick cash to a personalized installment loan within minutes.

Apply today and connect with the best alternative lending platform in the U.S. Borrow between $200 and $35,000. You could qualify even if traditional lenders turned you down. Our lenders are less rigid and cater to a variety of borrowers. Why wait?