How to Compare Interest Rates on Personal Loans

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Updated: March 20, 2024

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A personal loan is a financial solution used for various purposes, such as consolidating debt, financing significant purchases or covering unexpected expenses. This type of loan typically does not require collateral, making it accessible to a wide range of borrowers.

When shopping around for personal loans, one of the most important factors to look out for is the interest rate, as it directly impacts your monthly payments and the total amount repaid. Understanding and comparing interest rates from various lenders is crucial to securing a personal loan that aligns with your financial capabilities and goals.

Personal Loan Lender Common APR Ranges

Comparing interest rates when shopping for personal loans is an essential step for borrowers. This process allows you to identify the most cost-effective option, potentially saving significant amounts over the loan's lifespan.

By meticulously comparing rates, borrowers can ensure they receive a loan that aligns with their financial situation and goals. This careful comparison helps secure favorable terms and avoid unnecessarily high repayments, fostering better financial health and peace of mind.

First TechAPR Range9.29% to 14.09%
PenFedAPR Range7.99% to 17.99%
TruistAPR Range8.74% to 17.39%
Alliant Credit UnionAPR Range11.49% to 14.49%
Fifth Third BankAPR Range8.99% to 21.74%
Laurel RoadAPR Range9.49% to 24.25%
Happy MoneyAPR Range11.72% to 17.99%
SoFiAPR Range8.99% to 29.49%
LendingPointAPR Range7.99% to 35.99%
AvantAPR Range9.95% to 35.99%

What Is an Interest Rate?

Interest rates on personal loans are essentially the cost lenders charge for borrowing money, which is calculated as a percentage of the principal amount. These rates play a pivotal role in determining the overall cost of the loan, directly affecting the monthly payments and the total sum repaid over the duration of the loan. Generally, a lower interest rate means lower monthly payments and a lower total cost, making the loan more manageable for the borrower.

It’s worth noting that interest rates on personal loans often fluctuate based on economic conditions and other market variables. As of November 2023, the average interest rate on a two-year personal loan is 12.35%, according to the Federal Reserve.

As always, the ideal interest rate for a personal loan is the lowest possible rate that a borrower can secure. However, this rate is often only available to borrowers with strong credit profiles, including a high credit score, stable income and a good debt-to-income ratio. Lenders view these borrowers as low-risk and offer them more favorable terms.

Types of Interest Rates

Interest rates on personal loans typically fall into two categories: fixed and variable. Understanding the nature of each type is essential for borrowers to make an informed decision that aligns with their financial goals and risk tolerance.

  • Fixed Interest Rates: Fixed interest rates remain constant throughout the life of the loan. Borrowers know exactly their monthly payments, facilitating easier budgeting and financial planning. However, the drawback is that if market rates decrease, borrowers with fixed rates won't benefit from the lower interest rates. A fixed interest rate is ideal if you prefer stability and a predictable repayment schedule.

  • Variable Interest Rates: Variable interest rates can fluctuate over the loan term, tied to an index such as the prime rate. With a variable rate, there is potential for lower interest rates when market rates decline, possibly resulting in lower overall costs. However, this comes with the risk of increasing rates, leading to higher monthly payments and a more expensive loan in the long run. A variable interest rate is suitable if you are comfortable with some level of risk and have the financial flexibility to accommodate potentially higher payments.

Ultimately, choosing between fixed and variable interest rates hinges on market conditions and your financial circumstances and risk appetite. Understanding the benefits and drawbacks of each type helps you select the option that best suits your needs.

Understand the Annual Percentage Rate

Understanding the annual percentage rate (APR) is essential when comparing personal loan rates, as it encompasses both the interest rate and any additional fees associated with the loan. Presented as a percentage, the APR offers a comprehensive view of the total yearly cost of the loan beyond just the interest charged on the principal amount. This inclusive measure allows you to compare different loan offers accurately, considering all associated costs.

While the interest rate reflects the basic cost of borrowing the principal, the APR extends this calculation by including other expenses like origination fees, processing fees or prepayment penalties. This distinction is crucial for a true comparison. For instance, a loan might have an interest rate of 6%, but with additional fees amounting to 1% of the loan value, the APR would be higher.

By examining the APR rather than focusing solely on the interest rate, you better understand the financial commitment you’re considering. This approach ensures that you are better informed and can choose a personal loan with an interest rate that aligns more closely with your financial needs and capabilities.

Compare Loan Offers From Multiple Lenders

Comparing loan offers from multiple lenders is vital to finding the best interest rates on personal loans, as interest rates vary across different lenders due to distinct policies and risk assessments. It's recommended to review offers from at least three different lenders to get a broad perspective of the available options and to gauge the range of interest rates in the market. Exploring multiple options means you can pinpoint the most competitive rates, which could lead to significant savings over the loan's duration.

Beyond finding the lowest interest rate, comparing loans from different lenders also sheds light on varying terms and conditions. In addition to interest rates, factors like repayment terms, fees and penalties contribute to a loan's overall cost and suitability. A thorough understanding of these factors is crucial in choosing a loan that meets immediate financial needs and supports long-term financial stability.

When comparing loan offers, focusing on the APR is key as it encompasses both the interest rate and additional fees, providing a complete picture of the loan's total cost. Evaluating other aspects like repayment flexibility, potential prepayment penalties and customer service quality is also important.

Use Online Calculators

Using online calculators and comparison tools is an efficient way to compare personal loan interest rates, offering several advantages to borrowers. These tools streamline the process of evaluating various loan options, making it easier to make an informed decision.

By simply entering details like the desired loan amount, term and credit score, users can access a range of loan quotes instantly. This process saves you valuable time and provides a comprehensive view of the available rates, helping you identify competitive offers.

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Updated: Jul 12, 2024

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To make the most of these online tools, it's essential to accurately enter personal and financial information. When analyzing the results, you should consider the APR rather than just the interest rates. Focusing on the APR, which encapsulates additional fees, offers a fuller picture of the loan’s total cost. Reviewing the breakdown of monthly payments and the total amount to be repaid is also beneficial, as this provides insight into the loan's affordability.

Remember that interpreting the results involves balancing immediate financial benefits with long-term implications. Although lower interest rates appear more appealing initially, assessing the total cost over the entire loan period is crucial.

Factors Affecting Interest Rate on Personal Loans

Lenders take into account a variety of factors when determining interest rates for personal loans. Knowing and understanding these factors is crucial, as it can help you secure more favorable terms and manage your financial obligations more effectively. To make informed decisions, it's essential to recognize what influences the rates you might receive, such as:

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    Credit Score and History

    Lenders use credit scores to assess the risk of default — meaning, the better the score, the lower the risk. A strong credit history showing consistent repayments and responsible credit management contributes positively.

    loanPro icon

    Loan Amount and Term

    Generally, larger loan amounts and longer repayment terms are perceived as riskier, attracting higher interest rates. Short-term loans with smaller amounts typically have lower rates due to the reduced risk for lenders. Balancing the loan amount and term is key to obtaining an optimal rate.

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    Debt-to-Income Ratio

    The debt-to-income ratio measures your monthly debt payments against your income. A lower ratio indicates better financial stability, making you a less risky borrower, which can lead to lower interest rates. Conversely, high ratios may result in higher rates due to the perceived increased risk of repayment difficulties.

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    Market Conditions

    Economic factors like inflation, federal interest rates and the overall lending environment also influence personal loan rates. In a robust economy, rates might increase, while in a struggling economy, they might decrease. Keeping an eye on economic trends can provide insights into potential rate changes.

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    Lender Policies

    Different lenders have varying approaches to rate determination. Some may offer competitive rates to attract customers, while others might have higher rates due to their own cost structures or risk assessments. It’s important to compare rates from multiple lenders to find the best deal.

FAQ: Interest Rates on Personal Loans

The process of comparing interest rates on personal loans can raise numerous questions, especially for those navigating the borrowing landscape for the first time. MoneyGeek answered some frequently asked questions to help you gain valuable insight and make informed decisions.

What is the importance of comparing interest rates on personal loans?
How do I start comparing interest rates?
Should I choose a loan with the lowest interest rate?
What factors affect the interest rates offered to me?
Can I negotiate interest rates with lenders?
How do fixed and variable interest rates differ?
Is it better to choose a fixed or variable interest rate?
What should I do after finding the best interest rate?

About Christopher Boston

Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.