Loan Shopping: How to Find the Lowest Personal Loan Interest Rate

Interest rates may sound low when shopping for a loan, but don’t let that fool you. Securing the lowest personal loan interest rate is critical for reducing costs. The annual percentage rate (APR) can add substantial money to your loan for repayment.

As of March 14, 2023, the average personal loan interest rate is 19.74%.  The range among all lenders is 5.99% to 36% APR.

By qualifying for lower interest rates, you enjoy considerable cost savings. For instance, a $10,000 loan at 5.99% interest for 24 months will cost you $635.87 in interest. With a 20% interest rate, you will pay $2,214.99 in interest.

You need an excellent credit score and a low income-to-debt ratio to secure the best interest rates. Keep reading to learn more about these topics and other tips on receiving the lowest interest rates.

Credit Score

Checking and monitoring your credit score is easy if you use a service like Credit Karma. Not only will you be able to see your credit score, but you can also review Experian, Equifax, and TransUnion credit bureau reports to verify accuracy. If you see an error, submit a request for a correction or request a note of explanation is attached.

If you receive a credit denial, you can submit a request to the credit reporting bureau the lender used for a free copy of your report. Even without a rejection, these reports are available upon request from each credit bureau once a year. An annual check of all accounts helps you catch and correct errors quickly.

Make sure you pay all of your bills on time. If you have a low or no credit score rating, ask if your cell phone, streaming subscriptions, and utility service will report payments to the credit bureau.

One way to do this is through Experian Boost. This free service helps increase your credit score.

It works by connecting Experian Boost to your bank, credit card, or service providers. Boost looks for positive history and adds it to your Experian credit file.

Credit Utilization

To increase your chances of obtaining a low-interest-rate loan, pay off as many debts as possible.

Credit utilization is the difference between the amount of available credit and the amount you use. Thirty percent of your FICO score is credit utilization. The only factor that gets more consideration is your payment history at 35%.

Even if you pay the credit card balance in full every month, if your utilization percentage is high, creditors may consider you a loan risk. The recommendation is a credit utilization 30% lower than the credit available.

To determine your utilization percentage, divide the amount of credit you are using by the total amount of all credit available. Multiply that number by 100, and the answer is your percentage.

If you have a total of $10,000 available on your credit cards and are using $3,000 of that credit, you have a credit utilization ratio of 30% (3,000 ÷ 10,000 = 0.3 x 100 = 30).

Credit utilization is only calculated on your revolving credit. This is money you borrow and pay back on a regular, rotating basis, such as credit cards.

Debts like student loans and mortgages do not impact your credit utilization. They are installment loans with a set monthly payment for a specific period.

Debt-to-Income Ratio

Lenders consider your debt-to-income (DTI) ratio when determining whether they will authorize a loan, the loan terms, and the interest rate. This ratio is the sum of your monthly debts divided by your gross (before taxes) monthly income. The lower the ratio, the better the loan terms you can obtain.

If you have a gross monthly income of $4,000, and your monthly payments are $1,500 in rent, $200 auto loan, and  $600 in credit card and other debts, your debt-to-income ratio is 58% (1,500 + 200 + 600 = 2,300 ÷ 4,000 = 0.58).

This high DTI will concern lenders. The maximum DTI most lenders allow is 43%, but they prefer below 36%. 

Don’t Over Apply

Too many hard checks on your credit will lower your credit score. When you apply for a loan or credit card, the potential lender runs a hard credit check on you.

Only apply for one loan. Do not apply to several banks simultaneously, as each will run a hard check.

Be selective about what credit cards you submit applications for and how frequently. If you apply for several loans or credit cards, lenders may consider you short on cash or desperate for money, and therefore a higher risk.

Autopay Discounts

Ask the lender about autopay discounts. Some lenders provide lower interest rates when you allow them to deduct your loan payment from your bank account every month on a specified date. Even a small discount can add up over the course of the loan.

One thing to consider is that if you don’t have sufficient money in your bank account on the autopsy day, you will incur an insufficient funds charge from your bank and the lender.

Consider the pros and cons of this type of arrangement. Autopay offers convenience, security, no late fees, and lower interest rates.

The cons include forgetting how much money you have going out of your account. You may miss extra charges or monthly payment increases or risk overdraft fees if you have a low bank balance.

This out-of-sight, out-of-mind payment method also makes it easy to forget the benefits of making additional payments against your principal. If you can afford to pay extra on your loan, you reduce the repayment period and lower interest costs.

Shorten the Loan Period

When looking at loan options, consider accepting a shorter loan repayment period. Extended loan periods are riskier for lenders, so the interest rate is higher. You also pay higher interest over a 24-month loan than a 12-month loan period.

A $10,000 loan at 7% interest for 24 months will have a monthly payment of about $448 and a total interest of $745.42. The same loan for 12 months will have a monthly payment of about $865 and a total interest of $383.21.

You will save $362.21 in interest if you can afford the higher monthly payment. Evaluate your budget. A shorter loan period is more cost-effective if you can swing the amount.

Credit Card Loans

Getting a credit card cash advance is easy. The maximum loan is the total amount of credit you have available to use on the card, and they have a high-interest rate.

The average credit card interest rate is 22.70%. When you take a cash advance, that rate increases to an average of 27.68% to 28%.

In addition to a higher interest rate that begins accruing the minute you withdraw the money, there is usually a transaction fee. Your credit report will show this as a high credit card balance, not a bank loan. Lenders may interpret this as excessive spending.

A personal loan gives your credit mix variety. Credit mix is a factor lenders consider when reviewing a loan application. 

Get the Lowest Personal Loan Interest Rate

Check out online loan services to get the best personal loan interest rate. In many cases, you will find an easy application process with little or no credit check and the ability to receive funds direct deposited into your bank account within a few days.

The document requirements when applying for a fast loan are minimal. In addition to your loan application, you must provide legal identification, verification of income, and proof of address.

Some lenders may inquire about your reason for the loan request, check your credit score, review your monthly expenses, or require a cosigner. A personal loan is unsecured, so the lender wants to ensure you are a good credit risk.

Getting a Cosigner

A cosigner or co-applicant is someone that shares responsibility for the loan. If you default on the loan, they are obligated to pay.

Using a cosigner with a higher credit score ensures better loan terms and a lower interest rate. If the lender accepts co-applicants, this is an excellent way to build your credit rating.

It may be difficult finding a cosigner. Not only do they agree to repay the loan if you default, but the loan will also appear on their credit report and may impact their ability to get a loan in the future.

Understand Loan Terminology

When agreeing to accept a loan, read all documents and make sure you understand the terminology. 

• Annual Percentage Rate (APR)—annual interest cost to the buyer
• Borrower—the person applying for a loan, also called the applicant
• Cosigner—someone who signs the loan jointly with the borrower
• Fixed interest—interest rate doesn’t change during the loan
• Loan origination fee—upfront cost charged by the lender for administrative expenses
• Prepayment penalty—fee for paying off the loan early
• Principal—the amount of money you borrow
• Term—number of months to repay the loan
• Variable interest—interest and payments fluctuate throughout the loan

Understanding the terms of the contract and asking for clarification on anything you don’t know prevents mistakes and misunderstandings later.

Where to Apply

When looking for the lowest personal loan interest rate, you need Fast Loan Direct. We analyze your data and suggest a lender tailored to your needs.

Lenders provide between $100 to $35,000 in loans at 5.99% to 35.99% APRs with terms ranging from 91 days to 72 months. Get the money you need fast by applying for a personal loan today.