Based on the latest data published by the Federal Reserve, the average Annual Percentage Rates (APRs) for personal loans currently stand at 11.48%. In contrast, the average APRs for credit cards are currently recorded approximately at 20.09%.
Generally, a good APR on a personal loan is one that’s comparable to the current average rate or in other words, below the national average. To determine the current interest rate applicable to your specific area, you need to ascertain the rate prevailing in your region.
However, there are also other factors besides the national average APR, which is just a starting point. This also includes your credit score, the lender you chose and then the term of the loan. For example, borrowers with a good credit score will be able to qualify for APRs as low as 6% or 7% while the one with bad credit score may have to pay APRs of 15% or more.
Let's take a closer look at why these factors are so important for getting a personal loan with a low APR. However, before delving into these factors, it is essential to grasp the mechanics behind personal loan interest rates.
How do Personal Loan Interest Rates Work?
The rise of fintech and peer-to-peer companies in the past 10 years has made personal loans the fastest-growing debt category which has led to more affordable and accessible personal loans for borrowers, as these companies are able to offer lower interest rates and more flexible terms than traditional banks.
However, these loans are still subject to risk-based evaluations, as the interest rates are determined based on the borrower's individual risk profile.
Typically, the majority of companies providing personal loans utilize a risk-based approach to assess your application and determine both approval status and the applicable interest rate which includes your credit history, income debt, and other factors to assess your risk of defaulting on the loan. If you’re a high risk borrower, you’ll likely be offered a high interest rate and conversely, low-risk borrowers are often presented with more favourable interest rates due to their perceived reliability.
Strategies to Get the Best Deal for a Personal Loan?
To get a low APR personal loan it is important to understand what the things you could do to decrease how much you pay over the life of the loan.
To help you navigate the lending landscape and obtain the best deal for a personal loan, here are some effective strategies to consider:
Compare Rates from Multiple Lenders
Shop around and compare interest rates from multiple lenders to find the best deal for your needs. The more lenders you compare, the better your chances of getting a lower interest rate.
It's easy to get comfortable with the first offer you see, but don't be afraid to negotiate. Most lenders are willing to work with you to get you the best possible rate.
Here are some tips for shopping around for a personal loan:
These tips can increase your chances of getting the best deal for your needs.
You can also compare rates online or contact lenders directly. Most online lenders allow you to prequalify without affecting your credit score. Also, when comparing rates, be sure to compare apples to apples by comparing offers with the same loan term, down payment, and other terms. Don't forget to factor in closing costs when comparing offers, as they can vary from lender to lender.
Don't Get Hit with Hidden Fees
When applying for a personal loan, it is crucial to inquire about all associated fees, including interest rates, before proceeding with any paperwork. These fees can vary between lenders, typically ranging from 1% to 8% of the loan amount and are deducted before receiving the loan funds. Therefore, thorough examination of the fees and terms is essential.
Also, it is imperative to carefully read all loan documents, ensuring a clear understanding of the terms and conditions. By doing so, you can identify any potential hidden charges or clauses that could impact your finances adversely. Being diligent in this aspect safeguards your financial well-being and prevents any surprises during the loan term.
Short-Term Repayment Periods Can Save You Money
When choosing a loan repayment period, it is important to strike a balance between affordability and minimizing interest costs. A shorter repayment period will mean higher monthly payments, but you will pay less interest overall. A longer repayment period will mean lower monthly payments, but you will pay more interest overall.
The best way to choose a repayment period is to consider your financial goals and your budget. If you are able to afford higher monthly payments, then a shorter repayment period may be a good option for you. This will allow you to pay off your loan more quickly and save money on interest.
However, if you are not able to afford higher monthly payments, then a longer repayment period may be a better option for you. This will allow you to spread out your payments over a longer period of time, making them more affordable.