Personal loans provide quick access to a lump sum of cash that is repaid in predictable monthly installments, usually at a fixed interest rate. Because they often don’t require collateral, personal loans can be used however you see fit, whether you want to consolidate credit card debt or finance home renovations.
One of the most important factors to consider when borrowing a personal loan is the interest rate: the lower your rate, the less finance costs you’ll pay over time. And if you’re considering applying for a personal loan, there’s good news.
The average interest rate on a two-year personal loan fell to a record low of 8.73% during the second quarter of 2022, according to the Federal Reserve. This is the first time personal loan rates have fallen below 9% since the Fed began collecting this data 50 years ago.
It’s hard to say exactly why personal loan interest rates have dropped so significantly over the past quarter. Central bank data comes from about 75 banks that regularly release their “most current rate” in dollar volume. It is possible that the lower averages are linked to an increase in the share of secured personal loans, which tend to come with more favorable repayment terms since they are backed by collateral.
With interest rates hitting record highs, now might be the time to take out a personal loan to meet your financial goals. Here’s what you need to know about personal loan rates today.
How to get a low personal loan rate
Just because average personal loan rates were lower last quarter doesn’t necessarily guarantee that all applicants will get a good rate. Lenders calculate your interest rate based on your financial history, including your credit score and debt-to-equity ratio. Here are some tips for getting a low interest rate on a personal loan:
- Work on building your credit. Since personal loan rates are heavily based on the borrower’s credit history, it’s important to take steps to improve your credit score before applying, especially if you have fair credit.
- Choose a shorter loan term. If you can afford a higher monthly payment, choosing a two-year personal loan over a three- or five-year term can help you get a better interest rate. Plus, you’ll save more money over time since you pay less interest.
- Borrow only what you need. While it might be tempting to borrow a little more on a personal loan to free up some cash, it’s smarter to only borrow the amount of the loan you need to meet your financial goal, like paying off cards. credit. Small loan amounts tend to come with more favorable interest rates.
- Compare rates between lenders. Most personal lenders allow you to be prequalified to see your estimated interest rate with a soft credit check, which will not affect your credit score. You should prequalify with at least three lenders to find the lowest rate for your situation.
- Learn about credit unions. You may be able to get a lower interest rate on your personal loan through a credit union. If you do not belong to a credit union, you may generally qualify for membership depending on where you live or work.
- Consider a secured personal loan. Personal loans are usually unsecured, but some banks offer secured personal loans that are backed by a certificate of deposit or savings account. Putting collateral in place can help you get a better interest rate.
You should also look at the annual percentage rate, or APR, which includes the interest rate and other fees like origination fees. A personal loan APR gives you a complete picture of the cost of borrowing over the life of the loan.
How much are the repayments of a personal loan?
Personal loan payments are usually fixed, meaning they stay the same until the loan is paid off in full. Here’s an example: On a two-year $10,000 personal loan with an interest rate of 8.73%, you would make 24 monthly payments of approximately $456. During repayment, you will pay a total of $935 for interest charges.
Of course, the monthly payments of a personal loan vary greatly depending on the interest rate, the amount of the loan and the repayment period. You can see how the term of a $10,000 personal loan affects the monthly payment and total interest paid over the course of the loan in the table below.
|Personal loan over 2 years||Personal loan over 3 years||Personal loan over 5 years|
|Total interest paid||$964||$1,871||$3,961|
Although long-term personal loans tend to come with lower monthly payments, they are more expensive to repay over time due to higher rates and larger interest payments. In contrast, short-term personal loans come with more competitive borrowing costs, but the monthly payments will be higher.
You can use an online personal loan calculator to estimate your loan costs based on your interest rate, loan amount, and repayment term.
When to borrow a personal loan?
Personal loans can be used to pay for virtually anything, from essential medical procedures to unexpected home repairs. Like credit cards, personal loans generally don’t require you to use your property as collateral. But unlike credit cards, personal loans usually come with fixed interest rates and monthly payments. That said, it’s not always a good idea to take out a personal loan.
As a general rule, you shouldn’t go into debt for unnecessary expenses, like paying for a vacation or buying something you can’t really afford. Remember that personal loans have to be repaid with interest, so you’re essentially inflating the cost of your purchase.
However, personal loans can be a powerful tool, and they can even help you improve your financial situation in some cases. Here are some situations in which it may make sense to borrow a personal loan.
To consolidate credit card debt
Personal loans can be used to pay off high interest credit card debt in fixed monthly installments and often at a lower interest rate. The average interest rate on assessed credit card accounts was 16.65% in the second quarter of 2022, according to the Federal Reserve. This is significantly higher than the 8.73% rate on personal loans during the same period.
You can potentially use a personal loan to pay off one or more credit card balances while saving money and getting out of debt faster. Just make sure you don’t run up your credit card balances when you pay off the personal loan, or you’ll end up with even more long-term debt.
To make improvements to your home
Homeowners often use home equity loans or lines of credit, called HELOCs, to finance home improvements or repairs. However, these products require you to use your home as collateral, which can lead to foreclosure if you don’t repay the loan. It may also take several weeks to receive your home equity funds.
Alternatively, unsecured personal loans don’t use your home as collateral, and you may be able to receive funding the day after the loan is approved. It is important to note that interest rates on personal loans can be higher than those on home equity loans or HELOCs. Before making a decision, you should compare the rates of all your loan options, secured and unsecured.
To finance a big purchase
If you urgently need to buy a big-ticket item like an appliance or a new transmission for your vehicle, a personal loan usually offers more favorable repayment terms than revolving credit card debt. And since personal loan financing can be available in just days, you can have access to the capital you need to get your life back on track.
You should always consider your alternatives before borrowing money. For example, a mechanic may offer an interest-free installment plan to help pay for repairs to your car. And many top retailers offer financing arrangements to split large purchases into smaller payments without paying interest. As with any major financial decision, it’s important to weigh your options carefully.