When you need to borrow some money, of course, you want the lowest possible interest rates. But where can you find low interest personal loans? And what determines the interest rates lenders offer borrowers?
To get a good rate, there are a few things you’ll need to do. Here’s everything you need to know, plus a list of the 11 lenders with the lowest APRs for personal loans.
What are low interest personal loans?
A low interest personal loan is an unsecured loan for an individual borrower that comes with a lower than average interest rates.
But what qualifies as low?
Annual percentage rates (APRs) on personal loans range from as low as 5% up to over 500%. According to the latest report from the Federal Reserve, the average APR for a 24-month personal loan offered by commercial banks is 10.36%.
However, this average rate excludes loans with shorter terms. Also, commercial banks usually only offer unsecured loans to borrowers with good credit. Even with excellent credit, qualifying for a personal loan with an APR below 10% is not easy. The bottom line is there isn’t a clear-cut answer to what constitutes a low interest rate. A lot depends on the loan amount, the loan term, and the credit profile of the borrower.
Somewhat arbitrarily, we consider personal loans ‘low interest’ if they have an APR of 12% or less.
In most cases, loans with APRs above 50% have relatively short terms (36 months or less) and lend only low amounts (under $5,000). They are designed for people with poor or no credit.
Low interest personal loans, on the other hand, are designed for borrowers with fair-to-excellent credit. They come with loan terms up to 144 months and loan amounts of up to $100,000.
What are low interest personal loans used for?
Common uses for low interest personal loans include:
- Debt consolidation.
- Home improvements like purchasing new appliances, remodeling, etc.
- Moving or relocating.
- Buying a vehicle that doesn’t qualify for a standard auto loan.
- Paying for education like a trade school or coding camp.
- Enlisting professional services like a lawyer.
- Everyday expenses like childcare, food, rent, etc.
- Major life changes like weddings or babies.
- Medical procedures.
- Funeral services.
While these are some of the most common reasons to take out a personal loan, you can use yours for anything. Typically, lenders don’t know or care what you use the loan for. After all, the loans are not secured by the purchase you’re financing, but by your creditworthiness.
That said, financially speaking, some uses are more responsible than others. Here are a few good rules of thumb to follow:
- It’s best to use your loan to invest in something that could yield a return on your investment, like education, home improvements, or debt consolidation.
- It’s understandable (although not ideal) to use a loan to cover emergency expenses, such as a car or medical problem. Ideally, you would keep an emergency fund for such situations, but if you find yourself without savings in a crisis, a low interest personal loan might be the right solution.
- Borrowing money for frivolous expenses like vacations or weddings can put you into debt for years with no long-term return. It’s better to save the money in advance for these expenses.
Read more on the best and worst ways to use a personal loan.
The following lenders offer some of the lowest rates available.
How can you qualify for low interest personal loans?
First, you’ll have to find a lender that offers competitive interest rates and your desired loan terms.
Next, find out what kind of rates and terms you qualify for. Fortunately, many lenders offer online pre-qualification. Pre-qualification lets you find out whether you’re likely to qualify for a given loan, as well as what rates and terms you’re likely to qualify for. And getting pre-qualified won’t affect your credit score.
But only those with the best credit scores and financial profiles will qualify for the lowest advertised APRs. Here are the main factors that lenders consider.
What factors do lenders consider when evaluating borrowers?
- Debt-to-income ratio. How much debt do you have in relation to your income on a monthly basis? Lenders don’t want their borrowers to take on more debt than they can comfortably afford.
- Gross annual income. How much money do you make before taxes each year? The more you make, the more a lender is likely to lend you at a lower APR.
- Credit score. Typically, your FICO score as reported by the three credit bureaus (Experian, Transunion, and Equifax).
- Payment history. Have you kept up with your payments in the past? Lenders want to see good payment history.
- Current credit mix. How many types of credit accounts do you currently have, and how many have had in the past? It’s best to have a mix of revolving and installment accounts that are in good standing.
- Credit history length. How long have you held your credit accounts? Lenders like to see a well-established credit history that spans at least a few years.
- Credit utilization. How much of your available credit are you using on your revolving credit accounts? This figure speaks to your ability to manage your credit responsibly.
- Other. Lenders may also consider factors like civil status, education level, and work history to gauge the risk you present.
These factors determine whether you’ll get approved, as well as what rates and terms you qualify for.
But even if your financial profile isn’t perfect, you could still qualify for a relatively low APR. For example, Lightstream’s lowest APR is usually around 5%. This leaves plenty of room for applicants to get a higher-than-optimal rate while still landing under 12%.
To give yourself your best shot at securing a low interest rate, you should get the factors listed above in as good of shape as possible. Then, seek out lenders with competitive APRs.
How Do Low Interest Personal Loans Compare With Other Loans?
There are four major types of commercial loans: collateral-based loans, payday loans, business loans and personal loans. Some student loans are also considered commercial loans, although government-issued student loans are not. All commercial loans share one common characteristic: borrowers are evaluated on some financial basis, either creditworthiness or ability to repay the loan.
Collateral-based loans are backed by a guarantee of collateral, like a home or vehicle the loan is being used to purchase. Jewelry, financial instruments and museum-quality art may also serve as collateral for loans.
Payday loans are high-interest loans (usually in the triple digits!) with very short lending periods, often measuring in days or weeks. Such loans are not guaranteed by collateral and are often not underwritten by conventional credit guidelines. Typically offered by free-standing lenders rather than banks, payday loans should only be used as a last resort.
Business loans may or may not be collateral based. Banks and lenders often make their decisions concerning business loans based on the ability of business plans presented by borrowers. Business loans for established enterprises are based solely on how the lender views the prospects of the business owner(s) to repay the loans, while business loans for startups or less established companies must often rely on the personal assets of borrowers in addition to business assets.
Personal loans are unsecured loans, meaning that the borrower doesn’t have to put up any proof that they can repay the loan. These loans usually have high interest rates to protect the lender in case the borrower flakes on his debt. So, where do low interest loans fit in?
Low-interest loans are also personal loans, but with the benefit of a low APR. Also known as signature loans, this kind of loan doesn’t require proof of collateral. This is due to the strict credit underwriting process lenders require before issuing the loan. In plain English, to qualify for a personal loan with favorable interest rates and related terms, you must present an excellent credit profile – or provide a co-signer with excellent credit. They are extremely difficult to get, and unless your credit history is near-spotless and your credit score is a thing of beauty, you may need to go a different route.
Advantages and Disadvantages of Low-Interest Personal Loans
The advantages of low-interest personal loans are obvious – they provide ready cash to cover financial emergencies as well as to financial major purchases. If you consolidate your credit card debt with a low interest personal loan, you save money in the overall amount that you’ll repay. You also enjoy lower monthly payments, so long as you do not rack up new credit card debt.
But low interest personal loans also represent potential debt traps. Even though borrowers must undergo rigorous credit underwriting to qualify, interest rates for low-interest personal loans are nearly always higher than interest rates for collateral-based loans of similar amounts. If you fall behind on the payments of a low-interest personal loan, lenders may try to place liens on your bank accounts or other personal assets. In extreme cases, you may have to file for bankruptcy to escape your debts.
Potential Debt Traps
Even if you are borrowing for legitimate reasons, we all make mistakes. Especially if you have excellent credit and a substantial income, lenders may be a little too anxious to do business with you. Just remember that commercial lenders, unlike your family and friends, don’t have your best interests at heart. Their aim is to make money, even at the cost of detriment to you.
For instance, lenders may offer you a larger loan amount than you need. Resist the temptation—loans are not gifts; they must be paid back. Be wary of unrealistically low rates. Read the fine print to determine if you are signing onto a variable rate loan. You should also determine the total amount repayable (TAR) rather than the annual percentage rate (APR) when determining how much your loan will actually cost. High origination fees may drive up the TAR of an otherwise favorable low-interest personal loan.
The terms and conditions of the loan also matter. Avoid loans with hefty prepayment penalties, even if you fully intend to draw out repayment as long as possible. You may come into a windfall and find that paying off your loan is financially advantageous.
If You Decide to Pursue a Low-Interest Personal Loan . . .
Still interested in a low-interest personal loan? These are 8 steps that will help you qualify for one:
Low-Interest Loan To-Do List:
- Get a free copy of your credit report from each of the three bureaus. Check out our Credit Reporting Reviews page for more information.
- Evaluate your current FICO score. If it isn’t excellent, fix it. CreditKarma is a great place to get your free credit score.
- Pay down any credit card balances and ensure that other payments are up to date.
- Assess your income for the duration of the repayment period of the loans you consider.
- Secure your loan with an asset to get a better APR.
- Compare banks and credit unions. Your long-time credit union may offer advantageous terms on a loan, but an outside lender may offer better incentives to get your business. You may even want to try a micro-lender, or a P2P lender, for a lower interest rate.
- Compare loan terms. Low or no origination fees and no prepayment penalties trumps a lower interest rate with higher fees and stiff penalties.
- Read the fine print. You might be signing up to allow automatic withdrawals from your checking account or excessive fees for paying early.
Aside from the APR, what else should you consider when shopping for a low interest personal loan?
When seeking a personal loan, the APR is very important. It determines how much you’ll pay to borrow the money. But it’s not the only factor you should consider. You should also consider the following:
Many loans come with a slew of fees, which can substantially add to the total cost. In particular, you should keep an eye out for the origination fee, which typically ranges from 1% to 6% of the loan amount. Also, find out if the loan has a prepayment penalty, late fee, insufficient funds fee, etc. The fewer fees, the better.
Another important factor is how much money a given lender will lend out. It’s important to ensure their offered range contains the amount you want to borrow. For example, say you need to borrow $25,000. If one lender offers loans from $5,000 to $30,000 while another offers loans from $10,000 to $100,000, you may have better luck borrowing more from the second one. Further, a third lender that only lends up to $15,000 wouldn’t be a good fit.
The loan’s term is the amount of time over which you’ll pay back the loan. Terms often range from two to seven years. The longer the term, the more you’ll pay in interest. However, longer terms can also lower your monthly payment. You’ll need to find a lender that offers a term which fits your needs.
Lastly, consider each lender’s quality of customer service. Read reviews from past customers to find out how satisfied they were with the overall loan experience, from origination and delivery of funds to payment management and problem resolution.
Where can you find low interest personal loans?
Below are 11 reputable lenders that offer personal loans with APRs starting below 12%.
Any of the above lenders could potentially offer you the low interest rate you are looking for. However, applying with all of them individually can be time-intensive. Fortunately, SuperMoney’s loan engine has you covered.
FAQ on Low interest Personal Loans
What is Prime on a loan?
Prime rate is the interest rate that banks charge their preferred customers, or those with the highest credit ratings. It is used to determine borrowing costs on many short-term loan products.
Where can I get a low interest personal loan?
6 best low-interest personal loans available today are
- Citizens Bank
Do personal loans hurt credit?
A personal loan is an installment loan so debt on that loan won’t hurt your credit score as much as debt on a credit card that’s almost to its limit, thereby making available credit more accessible.
What credit score do you need for a personal loan?
To qualify for a personal loan, most lenders require that you have a minimum credit score, often somewhere between 580 and 600.
What factors do lenders consider when evaluating borrowers?
- Debt-to-income ratio
- Gross annual income
- Credit score
- Payment history
- Current credit mix
- Credit history length
- Credit utilization
Find your lowest interest rate on a personal loan
Click here to prequalify and get personalized loan offers from the above lenders and more! It won’t hurt your credit score, and it only takes a minute to get tons of loan offers.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.