What is the usual rate for a personal loan?

Interest rate is dependent on a wide range of factors including the type of financial institution offering the loan, but the applicant’s credit rating is the single most important factor. Many lenders tier their interest rates according to a person’s credit rating. The Fico credit score, which is one of the most popular metrics used by lenders ranges from 300 to 850 for individual borrowers.

The lower your score, the higher the interest rates charged by the bank because it indicates to the lender that you are a high risk lender with a history of defaulting on your monthly payments, or erratic income. With a poor credit rating, ranging between 300 and 360, you can expect a quote of 28% and up from most lenders but as your credit score improves, that number drops considerably. An excellent credit score (720-850) can enable you to be charged between 10% and 13%. Additional costs such as initiation fees and annual charges also go towards determining the APR and you should take them into account when estimating your repayments.

So, what is a Good Rate?

This varies from person to person, so giving a definitive answer is difficult to do. Basically, a good rate is one that you are able to service in time without undue strain on your finances. When determining a good interest rate for you, there is another number that you need to factor in, the annual payment rate (APR). The APR takes into account the total payment you have to make by the end of the loan term and gives a more accurate idea of the cost of borrowing.

For example, if you get a $100,000 personal loan at a fixed rate of 10% to be repaid over five years, you will have to repay about $165,000 by the end of the loan term. This translates to an APR of 13% and a monthly payment of $2,750. Generally, if the loan term is longer, the APR is lower and hence the PMT (monthly payment) will be lower. This combination is more suitable for people with lower monthly income, but by the end of the loan term, the cumulative amount paid back will be higher. In the example above, if your monthly income is $3000, then you would struggle to make the monthly payments and meet your household needs. However, for a person making $10,000 monthly, such an arrangement would be more manageable.

How to Qualify for a Low-Interest Personal Loan

As we have seen earlier, people with higher credit ratings are more likely to get lower interest rate loans from the lender, which makes this the easiest route to qualify for a friendly personal loan. There are some steps you can take to increase your credit rating which include making lump sum payments on your outstanding credit balances and purging your credit report for errors. If your credit score is very problematic, you can consider attaching an asset or having a friend guarantee the loan for you.

Going forward, you should ensure that your monthly debt obligations are discharged in time. Late payments without good reason unnecessarily lowers your credit score, and will ultimately lead to being locked out of access to credit. Generally, your lender will consider many other data points aside from your credit score. You may find it worthwhile to request audience with a credit officer from the institution to explain some of the items that the credit report cannot cater to. For example, a medical emergency that leads to defaulting on one payment may lead to a drop of 100 points in your credit score. When you explain to a credit officer personally about such a situation, they may be willing to approve a personal loan on better terms than your credit score dictates on paper.

Resources:

1. https://www.finder.com/personal-loan-annual-percentage-rate-apr
2. https://www.forbes.com/sites/tomanderson/2016/02/17/what-you-should-know-about-personal-loans/#408d5c6d3722
3. https://www.valuepenguin.com/personal-loans/average-personal-loan-interest-rates
4. https://www.fool.com/the-ascent/personal-loans/articles/whats-good-interest-rate-personal-loan/