The current market interest rates range between 6% and 36%, and as you may have already guessed it, those with excellent credit scores carry the day with the best interest rates on personal loans.
So, which are the industry’s best rates? What’s in for those with poor credit scores? We have that and more. But first, we list some of the top lenders.
Your interest rate is set depending on your credit history, income-to-debt ratio, and income stability. It’s also dependent on your lender – whether it’s a bank, credit union, or online lender.
You’ll be charged the lowest interest if you have an excellent credit score. This should be reflected on the lender’s APR – the total interest plus all other fees charged. So, when seeking a lender, their APR will help you in making an informed choice.
Lenders do a background check on your credit score during prequalification. Banks and credit unions will go hard on you here. This can cost you some points off your credit score.
Online lenders, on the other hand, carry out soft background checks.
It’s during this background check that you have a chance to compare their rates without actually affecting your credit score.
If you don’t know your credit score, you can check out with FICO, they’ll work it out for you. If you know your score, here’s a basic breakdown;
Having a poor credit score will only work to your disadvantage.
That said, the whole process of loaning is a risky one. Therefore, lenders lay out different measures to mitigate these risks.
Once you search for and find a suitable lender, they will check on whether or not you qualify for a loan before setting the suitable interest rate. This is called the prequalification phase.
Once the lender determines that you can be given a loan, they will then do a background check on your credit profile. You’ll need to supply such details as proof of income to gauge your ability to repay the loan.
Banks have some of the best rates in the market. And, if you’re already their customer, you’re eligible for loyalty discounts on rates. However, their eligibility requirements tend to be stricter than those for online lenders.
According to the Federal Reserve, in the second quarter of 2020, a personal 2-year loan attracts an average interest rate of 9.5%.
An auto mortgage with a 4-year term attracts an average interest rate of 5.13%.
Credit cards, on the other hand, attract an average interest rate of 14.52%.
According to the National Credit Union Administration (NCUA), credit Unions charge an average APR of 18%.
Among the top 5 lenders we pointed out above, SoFi and LightStream have the best interest rates in the market.
LightStream even has a program where individuals fitting certain criteria get a 0.1% reduction in APR. They also reduce your payable interest by 0.5% should you go for monthly auto payment.
Please note that lenders don’t give out loans with the lowest interest rates to all borrowers. Instead, such offers are only restricted to borrowers who meet certain qualifications.
As you shop around for lenders, look for ones with more friendly requirements and better rates.
You should also work to achieve a better credit score for even bigger opportunities.
Simply put, interest is the price you pay for taking a loan. You pay it on top of the original principle and other charges. Check out the following types of interest rates;
Fixed interest, like the name suggests, is the fixed amount you must repay together with the loan amount.
It’s the most common of all types of interests. It’s easy to calculate and borrowers are tied to the obligation of paying it with the loan.
It doesn’t change regardless of the loan period hence being an advantage to the borrower.
These types of interests fluctuate depending on the base interest rate, also called the prime interest.
When the base interest rises, the borrowers are forced to pay more. On rare occasions, they could decline, hence favoring the borrower. The change is mostly weekly or monthly.
Variable interests are common with mortgages.
The APR is basically your interest rates and other loan charges expressed annually. While the interest rates tell how much to pay monthly, APR will tell you what to pay throughout the life of the loan.
This is the interest rate charged when the Federal Reserve bank loans a smaller institution. The loans are often short-term, usually one day or overnight.
The loan mostly serves as emergency funding to an institution experiencing a short-term financial downside.
This is the most basic interest rate. It’s a one-off payment that doesn’t change throughout the term of the loan.
These are often used by banks to calculate bank rates. Here, lenders calculate the loan interest on an annual basis. Compound interests are common with savings accounts and credit cards.
You can borrow from $2000 to $100,000 on the best interest rates in different banks and credit unions, some of which we picked out in the table above.
Please note that how much you can borrow is not solely your decision. The lender determines how much you can borrow based on your credit profile and ability to repay.
That means whatever you apply for is subject to changes after the lender does a background check on you.
However, how much you can borrow shouldn’t be your only concern. The terms at which you borrow the loan is also crucial. Shop around for lenders with flexible terms and affordable interest rates, too.
As previously touched on, the APR represents the loan’s aggregate charges and is your best gauge to evaluate the most cost-effective personal loan option.
One of the lenders that provide the lowest APR, according to Bankrate.com, is LightStream. It offers a 5.95% APR, a $100,000 max loan amount, and a term length of 2 to 7 years. While not rated by the Better Business Bureau, its parent company Truist Financial Corporation has an A+ rating.
However, to get approved for a loan, LightStream requires a minimum credit score of 660 plus several years of good credit history.
So, if it’s an online lender that is as competitive as what LightStream’s offers but isn’t as stringent on credit score and credit history, SoFi Finance Inc. is the choice. SoFi’s APR is only higher by 0.05% compared to LightStream. And the way they assess creditworthiness is through free cash flow or the remainder of your income after paying all expenses.
These are the advantage and disadvantages you can get with Low-Rates Personal Loans.
Competitive APRs: low rate personal loans have the best APRs in the market – averagely 18%, and you’re eligible for a 0.5% reduction if you register for autopay.
Good to excellent credit score required: lenders offer lower APR to borrowers with excellent credit scores.
Low-interest rates: these loans have an average interest rate of between 6 and 36% - lower than what other loan products attract.
Approval not guaranteed: Your approval for low-interest loans isn’t guaranteed. It's subject to meeting preset lender requirements.
Low loan amounts available: You can borrow from as low as $2000. This way, you won’t be forced to borrow more than you need.
Flexible Repayment Terms: Most low-interest loans have an average repayment of up to 7 years.
SoFi, LightStream, BestEgg, and Payoff boast some of the best interest rates. Check them out on the table above.
Low-interest loans charge average interest rates of between 6% and 36%.
Most low-interest lenders will require you to have a credit score of above 640.
Online lenders offer some of the best interest rates. You can also try out banks and credit unions.
Lenders will mostly look at your credit score, income stability, and debt-to-income ratio.