Personal Loan Tips: How to Get the Best Loan Rate For You

 October 10, 2020
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The first of many personal loan tips is that this product is one of the cheapest ways to borrow. In fact, the average personal loan rate in May 2020 was 9.50%, well below the 15.78% average on interest-charging credit card accounts, according to data from the Federal Reserve.

But if you want to know how to get your best loan rate possible, you’ll need to consider other advice about strengthening your application and evaluating offers.

Here are 11 personal loan tips to help.

1. Improve your credit
2. Swing your debt-to-income ratio in the right direction
3. Look for top personal loan providers
4. Get multiple offers for personal loan rates
5. Compare personal loan APRs — not just base rates
6. Choose a shorter personal loan term
7. Pay attention to total loan costs and payments
8. Consider a variable rate on your personal loan
9. Add a personal loan cosigner
10. Consider a secured personal loan
11. Sign up for personal loan rate discounts

1. Improve your credit

Your credit is key to determining how to get the best loan rate possible for you: You need to maintain a positive credit history and high credit score. But if your credit isn’t as great as you’d like it to be, you can improve your credit in a matter of months by:

  • Getting added as an authorized user on an existing credit card account
  • Opening a secured credit card and using it responsibly
  • Checking your credit reports for errors and fixing any mistakes

Also, practice ongoing healthy credit habits, including:

These financial habits will help you improve your credit score in no time. Remember: The higher your credit score is, the lower your personal loan rates likely will be.

2. Swing your debt-to-income ratio in the right direction

Beyond credit score and history, debt-to-income ratio (DTI) is a crucial factor that could make or break your personal loan application.

Personal loan companies view your DTI as an indicator of whether you have the necessary cash flow to afford your repayment, alongside obligations for your other debt. DTI is easily calculable using our tool:

Debt-to-Income (DTI) Calculator

A DTI of less than 35% puts you in a positive territory, but some personal loan lenders will still lend to you with percentages well into the 40s.

If your DTI is too high, you might take on the following tasks before proceeding with a personal loan application:

  • Comb through your budget and use savings to knock down any debt, starting with higher-interest accounts first
  • Increase your income with a promotion at work or a side hustle after hours

3. Look for top personal loan providers

This personal loan tip might sound obvious, but for many borrowers it’s a step too often skipped.

Different kinds of lenders will be able to meet different needs, and you’ll want to find one that provides what you’re looking for.

From a specific feature to low fees and rates, you can find what you want by checking different types of personal loan providers:

The only way to know you’re getting your best possible personal loan rates is to check the terms and options different lenders offer.

Our marketplace of recommended personal loan lenders is a good place to start your search.

4. Get multiple offers for personal loan rates

Not every lender has the same criteria for approving borrowers. Because each lender has its own formula for setting your personal loan rates, it’s smart to put each one to the test.

First, get rate offers from different lenders. Look for lenders that offer personalized rates generated with soft credit checks, which won’t ding your credit.

Lenders can extend a rate offer with a few details from you, allowing you to compare personal loans and find the best one available to you.

5. Compare personal loan APRs — not just base rates

Interest is a significant loan cost. But loan origination fees, applications fees and other charges also can add up.

Start by comparing the annual percentage rate (APR) for each personal loan offer.

A personal loan APR is calculated to include all fees and interest and to reflect your true loan costs. Make sure you’re not paying more than you bargained for with a low personal loan rate, thanks to fees and other charges.

6. Choose a shorter personal loan term

The faster the lender gets its money back, the less risk the loan carries. That’s why lenders often reserve their best personal loan rates for short-term loans repaid in three to five years or less.

For figuring out how to get your best loan rate, try to choose the shortest personal loan term. Go for the shortest-term offer that allows you to both borrow the amount you need and keep monthly payments manageable.

There’s an exception to this rule, however: Be wary of payday-style loans that might call for a fast, months-long payoff. These products can carry outrageous interest rates. Our personal loan tip? Avoid these types of loans until it’s a last resort.

7. Pay attention to total loan costs and payments

As you’re working to get your best personal loan interest rates, it’s important to keep an eye on how different terms will affect your monthly payments and total costs.

Use our personal loan calculator to see how different terms will affect the following factors:

  • Total costs: These are all the charges you’ll pay over the life of the loan. Total costs will be higher with long-term personal loans since they carry higher rates and are repaid more slowly.
  • Monthly payments: These also should be affordable. While a short-term personal loan will come with lower interest rates, it also will increase monthly payments. You’ll need to choose a loan length that results in affordable payments so you won’t fall behind.

8. Consider a variable rate on your personal loan

Next, consider fixed or variable personal loan rates.

A fixed rate usually starts a little higher but doesn’t change over the life of the loan. A variable rate, on the other hand, is initially lower but will adjust with current interest rates, often rising as the months pass.

Still, choosing a variable rate can help you secure a lower personal loan interest rate. It will make the most sense for short-term personal loans, which you’re likely to pay off before your rate gets too high.

If you prefer knowing what your exact monthly payment will be for the duration of your repayment, however, the risk-averse nature of a fixed rate is likely a better fit.

9. Add a personal loan cosigner

Even if you have poor or fair credit (a FICO Score of 580 to 670 or so), lenders might still approve you for a loan. However, you’ll likely face higher personal loan rates.

One way to avoid this is to “borrow” the good credit of someone you trust by asking them to cosign your personal loan. When you add a cosigner to your personal loan application, the lender considers the credit histories of you and your cosigner as well as other financial information.

Because your cosigner’s better credit is taken into consideration, a cosigner can help you access the best personal loan rates for you, even if you couldn’t qualify on your own previously.

10. Consider a secured personal loan

The term “personal loan” often refers to an unsecured personal loan that doesn’t require collateral.

A secured loan, on the other hand, is guaranteed by collateral — a valuable asset the borrower owns. Secured personal loans can be borrowed using assets such as:

  • Home equity
  • Auto equity
  • Savings or investments
  • Future paychecks

An asset also acts as a guarantee of the personal loan, lowering the lender’s risk and making it more likely to approve bad-credit personal loans.

Also, many lenders will offer lower personal loan rates when the account is secured by an asset. Just be sure you’re willing to risk that asset before opting for a secured loan. Our personal loan tip is that recruiting a cosigner for an unsecured loan (see No. 9, above) could be a safer bet.

11. Sign up for personal loan rate discounts

One last personal loan tip for additional savings: Check to see if your lender offers rate discounts. For example, many lenders offer a small rate discount, usually 0.25 percentage points, to borrowers who enroll in automatic debit payments.

Lenders often include this discount in their advertised rates, so make sure you take it into consideration as you compare rates. And once you have the loan, enroll in autopay to make your best personal loan rate even better.

As you shop around, weigh each option against your own situation to make the right choice. By knowing and comparing your options — and following our personal loan tips — you can get your best personal loan interest rates available to you.

Andrew Pentis contributed to this report.