A Complete Guide To Personal Loan Interest Rates

4 Min Read
Updated March 30, 2023
Written By
Jamie Johnson
A man on his laptop working in a cafe.

A personal loan is an unsecured loan you can use for a variety of purposes. You can take out a personal loan to consolidate debt, finance a home improvement project or pay for a major expense.

When you take out a personal loan, you’ll have to repay the loan with interest, so you want to find a loan with a low interest rate whenever possible. But how do personal loans work and what is a good interest rate on a loan?

This article will explain what to look for in personal loan rates and how to compare your loan options so you can find the best rates and terms on your personal loan.

How Do Personal Loan Rates Work?

Since personal loans are unsecured debts, there’s no collateral attached to them. Unsecured loans are riskier for lenders since they have no assets to seize if you default on the loan. For that reason, interest rates tend to be higher for personal loans.

The interest rate you receive will determine your monthly payments and the total amount you pay over the life of the loan. Most personal loans come with fixed rates, which means the interest rate doesn’t change and you’ll have predictable monthly payments.

For instance, let’s say you take out a $5,000 personal loan with a 10% interest rate and 5-year repayment term. Your monthly payments will be $106.24, and you’ll end up paying $1,374.11 in interest.

Let’s say you took out the same loan, but your interest rate is 13.5%. Your monthly payments will increase to $115.05, and you’ll pay $1,902.95 in interest.

If you want to save on interest payments, you could shorten the loan terms, which means your monthly payments will go up. Likewise, if you want to lower your monthly payment, you could extend the loan terms, but that means you’ll pay more in interest.

It’s important to differentiate between the interest rate vs. the annual percentage rate (APR). The interest rate is the base rate you’ll pay for taking out the loan, while the APR includes the interest rate and any additional fees, like origination fees.

See What You Qualify For

What Is The Current Average Personal Loan Interest Rate?

According to the Federal Reserve, the average personal loan interest rate is 10.16% as of August 2022. This rate is up from the beginning of the year — in the second quarter, the average rate was 8.73%. The recent rate hikes have caused interest rates to rise across the board.

How Are Interest Rates For Personal Loans Determined?

The interest rate you receive for a personal loan depends on the following factors.

Credit Score

Borrowers with excellent credit scores and good credit history will qualify for a lower interest rate and APR on their personal loans. You’ll likely need a FICO® Score of about 670 to qualify for a good rate.

You may still qualify for a personal loan even if your credit score is below 670. But borrowers with fair and poor credit will receive higher rates, shorter loan terms and smaller loan amounts if they do qualify. 

Debt-To-Income Ratio

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward debt payments. If you have a high DTI, lenders will view you as a higher risk since this could indicate that you’ve over-extended your budget.

Personal Loan Terms

The larger the loan amount and the longer the loan term, the higher your loan rate and APR may be. The type of personal loan you apply for will also impact the interest rate you receive. For instance, you could earn a better rate by taking out a secured loan since the loan is backed by collateral.


Lenders will also require you to submit proof of income, and your annual income is also used to determine your personal loan rate. Your income is also used to determine how much money you can borrow.

How To Get A Lower Personal Loan Rate

Since your personal loan rate affects how much you’ll pay, you want to find the best rate possible. Here are some steps you can take to get a lower personal loan interest rate: 

  • Build your credit – a higher score means better terms
  • Pay down debt, especially high-interest credit card debt
  • Lower your DTI — aim for 43% or less
  • If you already have a personal loan, refinance your loan to get a better rate and terms
  • Shop around for the best personal loan interest rates

Personal Loan Rates: FAQs

If you have more questions about how to find the best personal loan rates, the following FAQs might help.

What are the benefits of low interest rates for personal loans?

A lower interest rate on your personal loan means your monthly payments will be lower. You’ll also pay less in total interest over the life of the loan.

How do I find the best interest rate for personal loans?

You’ll receive the best interest rate on your personal loan by improving your credit score, lowering your DTI and comparing your loan options among different lenders.

The Bottom Line

Taking out a personal loan can help you meet your personal and financial goals, but you want to shop around for the right loan option for your goals. Take some time to improve your financial situation by improving your credit score and paying down debt. 


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