Personal loans offer 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 like — whether you’re consolidating credit card debt or financing home renovations.
One of the most important factors when taking out a personal loan is the interest rate: the lower your interest rate, the less financing costs you will pay over time. And if you’re thinking about applying for a personal loan, there’s good news.
According to the Federal Reserve, the average interest rate on a two-year personal loan fell to a record low of 8.73% in the second quarter of 2022. This is the first time personal loan interest rates have fallen below 9% since the Fed began collecting this data 50 years ago.
It’s hard to say why personal loan rates fell so significantly over the past quarter. The central bank’s data comes from about 75 banks that regularly report their “top interest rate” by dollar volume. It is possible that the lower averages are related to an increase in the share of secured personal loans, which tend to offer more favorable repayment terms because they are backed by collateral.
With interest rates hitting record lows, now may be the right time to take out a personal loan to help you achieve 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 creditworthiness and debt-to-income ratio. Here are a few tips to get a cheap interest rate on a personal loan:
- Work on building your credit score. Because personal loan rates are highly dependent on a borrower’s credit history, it’s important to take steps to improve your credit score before applying, especially if you have a fair credit history.
- Choose a shorter loan term. If you can afford a higher monthly payment, choosing a two-year personal loan with a three- or five-year term can help you get a better interest rate. Plus, you save more money over time because you make fewer interest payments.
- Only borrow what you need. While it may be tempting to borrow a little extra money on a personal loan to free up cash, it’s wiser to only borrow the amount of credit you need to reach your financial goal, such as B. Paying off credit cards. Smaller loan amounts tend to have lower interest rates.
- Compare lender interest rates. Most personal lenders allow you to pre-qualify to see your estimated interest rate with a gentle credit check that doesn’t affect your credit score. You should pre-qualify with at least three lenders to find the lowest interest rate for your situation.
- Check out credit unions. You may be able to get a lower interest rate on a personal loan through a credit union. If you don’t belong to a credit union, you can usually qualify for membership depending on where you live or work.
- Consider a secured personal loan. Personal loans are typically unsecured, but some banks offer secured personal loans backed by a certificate of deposit or savings account. By providing collateral, you can get a better interest rate.
You should also look at the APR or Annual Percentage Rate, which includes the interest rate and other fees such as a setup fee. A personal APR gives you a complete picture of borrowing costs over the life of the loan.
What are the Personal Loan Payments?
Personal loan payments are usually fixed, meaning they remain the same until the loan is repaid in full. Here’s an example: On a two-year $10,000 personal loan at an 8.73% interest rate, you would make 24 monthly payments of approximately $456. Over the course of the repayment, you would pay a total of $935 in interest costs.
Of course, the monthly installments for a personal loan vary greatly depending on the interest rate, loan amount and term. In the table below, you can see how the tenure of a $10,000 personal loan affects the monthly payment and the total interest paid over the course of the loan.
|2 year personal loan||3 year personal loan||5 year personal loan|
|Total Interest Paid||$964||$1,871||$3,961|
While long-term personal loans typically come with lower monthly payments, they are more expensive to repay over time due to higher interest rates and higher interest payments. On the other hand, short-term personal loans come with more competitive borrowing costs, but monthly payments are higher.
You can use an online personal loan calculator to estimate your borrowing costs based on the interest rate offered, the loan amount, and the repayment period.
When should you take out a personal loan?
Personal loans can be used to pay for virtually anything, from important medical procedures to unexpected home repairs. As with credit cards, personal loans usually don’t require you to use your property as collateral. However, unlike credit cards, personal loans usually come with fixed interest rates and monthly payments. However, taking out a personal loan is not always a good idea.
As a rule of thumb, you should not get into debt for unnecessary expenses, e.g. B. for a vacation or buying something you can’t really afford. Keep in mind that personal loans have to be repaid with interest, so you’re essentially inflating the cost of your purchase.
Still, personal loans can prove to be a powerful tool and in some cases even help you improve your financial situation. Here are some situations in which it may be a good idea to take out a personal loan.
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. According to the Federal Reserve, the average interest rate on credit card accounts in the second quarter of 2022 was 16.65%. That’s significantly higher than the 8.73% interest rate on personal loans over the same period.
You may be able to use a personal loan to pay off a credit card or credit card balance while saving money and getting out of debt faster. Just make sure you don’t skyrocket your credit card balances when you pay off that personal loan, or you’ll be stuck with even more debt in the long run.
To improve your home
Homeowners often use home equity loans or lines of credit, called HELOCs, to fund improvements or repairs. However, these products require you to use your home as collateral, which carries the risk of foreclosure if you fail to repay the loan. It can also take several weeks before you receive the funds from your home.
Alternatively, unsecured personal loans do not use your home as collateral, and you may be able to get financing the very next day after loan approval. It’s 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 interest rates on all of your loan options, both secured and unsecured.
To finance a large purchase
If you urgently need to buy a large item like an appliance or a new transmission for your vehicle, a personal loan usually offers better repayment terms than revolving credit card debt. And because personal loan financing can be available in just a few days, you can access the capital you need to get your life back on track.
You should still look for alternatives before you borrow money. For example, a mechanic may offer an interest-free installment plan so you can afford car repairs. And many prominent retailers offer financing arrangements to split large purchases into smaller payments without paying interest. As with any major financial decision, it’s important to carefully weigh your options.