Personal Loans

How to qualify for a low-interest personal loan

By
Tim Maxwell,
edited by
Kelly Larsen
Updated Aug. 17, 2023, 10:24 a.m. ET
A pair of wooden blocks with a percent sign and arrows.
Shutterstock

Personal loans can be a valuable t⭕ool for consolidating high-interest 🅠debt, paying for a large expense, or almost any other purpose. But a personal loan with a high interest rate could lead to an unaffordable level of debt.

You’ll need good or excellent credit to get a lower interest rate, at least 670, but the higher the better. Rates vary by lender, but loan✅ options exist for a wide range of credit scores.

It’s essential to understand how to snag a low𒊎er interest rate before you take out a personal loan.

Understanding interest rates

Interest is the cost you pay a lender or creditor to borrow money. It’s usually expressed as an annual percentage called an interest rate. Interest rates vary and ꩵusually depend on yourܫ credit profile, income, and other factors.

Generally speaking, lenders charge interest on your balance until you pay it off completely. As such, the goal of any borrower is to find꧒ the lowest interest rate possible to minimize the interest you’ll pay on top of your original loan amount.

Fees are another factor adding to the cost of a loan or credit product. If you want to know the true cost of borrowing money, refer to a loan’s annual percentage rate (APR), which includes both the interest rate and fees🧜 associated with the loan.

Many consumers who need money prefer personal loans over credit cards, as their interest rates tend to be significantly lower. According to the most recent Federal Reserve data, the average interest rate for🃏 a 24-month personal lo🦹an is 11.48%, while the average interest rate for credit cards is 20.92%.

How to qualify for a low-interest loan

You’ll likely nee𒁏d a credit score that falls in the good or higher 💝credit-score ranges to qualify for a low-interest personal loan. Here’s how the FICO credit score ranges break down:

  • Exceptional: 800 to 850
  • Very Good: 740 to 799
  • Poor: 300 to 579

If your credit score isn’t where you’d like it to be, try to improve your credit before applying for a low-interest personal loan. Even improving﷽ your score from fair to good may res💞ult in a lower interest rate that could save you hundreds or thousands of dollars over the life of a loan.

Low-interest loans with poor credit

Generally, higher credit scores translate to lower interest rates. Fortunately, some lenders specialize in loans for borrowers with lower credit scores. Keep in mind, however, you’ll likely pay a higher interest rate for💝 this type of loan than you would with a higher credit ℱscore.

If your credit makes it difficult to obtain a new loan, consider enlisting a close friend or relative with strong credit to cosign for the loan. A creditworthy cosigner can improve your odds of ap❀proval for a personal loan an๊d with more favorable terms. Remember, your cosigner is responsible for repaying the loan if you fail to make your payments.

If you need cash to address a financial emergency, be mindful of predatory lenders. For example, you may see offers for , pawn shop, and car title loans typically aimed at borrowers with poor credit.

While these types of loans are easy to qualify for, they typically come with staggeringly high costs. According to the Consumer Fi✃nancial Protection Bureau, the fee structure with a typical two-week payday loan is equivalent to an APR of nearly 400%. Only consider these types of loans as a last resort due to their whopping costs and the potential to get stuck in a 🦋cycle of debt.

How to increase your credit score

You may save money in interest charges by taking steps to improve your credit score before you apply for a new loan. Here’s how:

  • Correct errors on your credit report: One of the fastest ways to improve your credit is to fix any errors on your credit report. Order free weekly copies of your credit reports through the end of the year at AnnualCreditReport.com. Carefully review them for accuracy. If you find any erroneous or fraudulent information, file a dispute with the appropriate credit bureau.
  • Pay your bills on time: Your payment history is the most important factor in your credit score, accounting for 35% of its calculation. Consider setting up auto payments for your bills, so you never miss a payment. Even one 30-day late payment could negatively impact your credit score.
  • Pay down credit card balances: Your credit utilization ratio makes up 30% of your FICO credit score. That’s the amount of available revolving credit you’re using compared to your credit limits. Generally, the lower your credit utilization, the better. Paying down your revolving credit may not only reduce your credit utilization ratio, but it can also lower your debt-to-income ratio (DTI). DTI is the total amount of your monthly bills compared to your gross, or pretax, monthly income. Maximum DTI requirements vary by lender, but typically lenders prefer below 36%.
  • Limit new credit accounts: As a general rule, limiting how often you apply for new credit is wise. Remember, new credit applications typically lead to a hard inquiry, which can cause a small, temporary dip in your credit score. One hard inquiry may have minimal impact on your score, but several inquiries can add up and have a less desirable effect. Also, opening a new account could lower your average age of accounts, which accounts for 15% of your credit score.

Is a personal loan right for me?

Deciding whether or ꧂not you should take out a personal loan depends on your goals and unique financial circumstances. Of course, you’ll want to get the lowest interest rate possible, but there are other factors you should weigh, such as:

  • APR: Your APR expresses the true cost of borrowing money, as it includes the interest rate and associated fees. You can keep your costs down by getting the lowest interest rate available.
  • Fees and charges: Excessive fees can offset any savings you receive from a lower interest rate. For example, the origination fee alone can range from 1% to 10% of the borrowed amount. Make sure you understand the fees attached to a personal loan before you commit.  
  • Loan amount: Personal loan amounts range from $1,000 to $100,000. The amount you’re eligible to borrow will depend on your income, debts, and other factors.
  • Repayment terms: Review the repayment schedule and monthly payment to make sure it fits within your budget. A longer repayment term can lower your monthly payment but increase the overall cost of the loan.
  • Discounts: Ask a lender what discounts you may be eligible for, such as a loyalty discount for getting your loan with your existing bank or a discount for setting up auto payments.