Personal Loan APRs: What’s Considered a Good Interest Rate and Average APR?
Americans collectively owe a staggering $249 billion in personal loan debt as of the third quarter of 2024, reflecting a $3 billion increase from the previous quarter and an $8 billion rise from the same period last year. This surge highlights the growing reliance on personal loans, whether for consolidating debt, covering unexpected expenses, or funding significant life events at an average rate. With personal loan APRs varying widely, understanding what constitutes a “good” rate is crucial to making informed borrowing decisions and minimizing financial strain.
This guide breaks down the meaning of APR, benchmarks for what qualifies as a good interest rate across various loan types, and practical strategies to secure the best personal loan options. By the end, you’ll have all the tools to make informed borrowing decisions and avoid costly pitfalls while aiming for the lowest rate available.
Key Takeaways
- What is a good APR? It varies by loan type, but knowing general benchmarks can help.
- Factors like credit score, income, and lender type significantly impact the APR offered.
- You can secure the most affordable loan by improving your credit score, comparing loan offers, and understanding the average interest rate components of APR.
Now that we’ve established why APR matters, let’s explore its definition and significance in more detail.
Table of Contents
Understanding APR: What Does It Mean for Borrowers?
APR stands for Annual Percentage Rate. It’s the total cost of borrowing expressed as a yearly percentage. Unlike the interest rate, which only reflects the cost of using the borrowed funds, APR encompasses all associated fees, such as origination fees, application fees, and other charges.
Breakdown of APR Components:
- Interest Rate: The core cost of borrowing money includes loan payments and interest rates that can vary significantly.
- Fees: Various charges associated with the loan, including:
- Origination Fees: A percentage of the loan amount the lender charges to process the loan, which contributes to the overall loan APR.
- Application Fees: A fixed fee for processing your loan application.
- Late Payment Fees: Penalties for missed or late payments can lead to a higher rate on future loans, impacting your ability to qualify for a personal loan.
For example: A loan with a 5% interest rate but $1,000 in fees could have an APR of 6.5%. This means you’ll be paying more over time, even though the interest rate is lower than the average rate.
Understanding APR ensures you can evaluate loans effectively and choose the most cost-efficient option.
Next, let’s explore what constitutes a “good” APR for various loan types.
What Is Considered a Good APR for Different Loan Types?
Current Average Personal Loan Interest Rate:
While these are general APR ranges, keep in mind that personal factors like credit score and income can significantly affect the rate you’re offered. Let’s break down the ranges for each loan type:
| Loan Type | Good APR Range |
|---|---|
| Mortgages | 6%–7.02% (30-year Fixed-Rate) |
| Auto Loans | 7%–11% |
| Personal Loans | 6%–36% |
| Credit Cards | 14%–25% (Lower for excellent credit) |
| Student Loans | 3.5%–8% (Federal); 5%–14% (Private) |
Note: These are general ranges. Your individual APR and the rate on a personal loan will depend on several factors discussed below.
Knowing what a good APR looks like is crucial, but what factors determine the rate you’ll be offered?
Factors That Influence APR
Credit Score: Your credit score is the most significant factor determining your personal loan APR. Higher credit scores qualify you for lower interest rates.
| Credit Score | Average personal loan rate |
|---|---|
| Excellent (720+) | 10.73%-12.50% |
| Good (660–719) | 13.50%-15.50% |
| Fair (580–659) | 17.80%-19.90% |
| Poor (<580) | 28.50%-32.00% |
Tip: If you have an excellent credit score (720+), aim to keep it high by paying off existing debt to maintain a good personal loan rate. If you’re in the ‘fair’ or ‘poor’ range, focus on small, achievable improvements like reducing credit card balances to secure a good interest rate.
Income and Debt-to-Income (DTI) Ratio: Lenders assess your loan repayability by evaluating your income and existing debt obligations to determine the lowest rate they can offer. A higher income and a lower DTI ratio (total monthly debt payments divided by gross monthly income) generally result in lower APRs compared to the federal funds rate.
Tips: Lower your DTI by paying down debt or boosting your income with a side hustle to qualify for better terms.
Employment History: A stable and consistent employment history demonstrates your ability to repay the loan. Gaps in employment can negatively impact your APR.
Economic Conditions: Factors like inflation, Federal Reserve policies, and overall economic growth influence interest rates and APRs.
Lender Type: Different lenders (banks, credit unions, online lenders) have varying lending criteria and may offer different APR ranges.
Strong financial metrics (credit score, income, and employment history) directly influence the APR offered.
Now that we’ve covered the factors influencing APR, let’s focus on actionable ways to secure a low rate.
How to Get a Low APR on a Personal Loan Rates
- Compare Multiple Offers: Leverage online tools and loan comparison platforms, including a personal loan calculator, to compare personal loans and gather personalized quotes from various lenders, including banks, credit unions, and online lenders. Comparing these offers can help you identify the most competitive APRs and favorable terms. Look beyond the APR to consider additional fees and repayment flexibility.
- Improve Your Creditworthiness: Strengthen your financial profile before applying for a loan. Review your credit report for inaccuracies or unresolved issues, and work on resolving them promptly. Focus on reducing your outstanding debts, particularly revolving credit balances, to improve your debt-to-income (DTI) ratio. A better credit score and lower DTI ratio signal reliability to lenders, often leading to more favorable APRs.
- Negotiate with Lenders: Approach lenders confidently and inquire about improving the loan APR and other terms. If you have a strong credit score or solid financial history, use it as leverage to negotiate a lower APR or the best personal loan terms. Even if the initial offer doesn’t meet your expectations, lenders may be willing to make adjustments to retain your business.
- Consider Co-Signers or Secured Loans: If you cannot independently qualify for a low APR, consider enlisting a creditworthy co-signer. Their financial stability can help reduce lender risk, resulting in a more competitive APR. Alternatively, secured loans—backed by collateral such as a vehicle or savings account—may yield lower APRs and better interest rates. However, ensure you can comfortably repay your loan payments to avoid losing the collateral.
However, not all lenders operate in good faith, and some may impose higher interest rates. Let’s examine how to identify and avoid predatory practices.
Avoiding Predatory Lending Practices
- Signs of Predatory Lending: Excessively high APRs, hidden fees, unclear terms and conditions, and aggressive sales tactics.
- Research and Verify Reputable Lenders: Use online resources, check with the Better Business Bureau, and read customer reviews to identify reputable lenders.
Avoiding predatory lending ensures you’re not paying more than necessary for your loan.
Once you’ve identified a trustworthy lender, it’s time to evaluate whether the loan meets your financial needs.
How to Determine if an APR Is “Good” for You
- Assess based on: Loan purpose and type, affordability of monthly payments, and how the APR compares to market averages.
- Calculate the Total Cost of the Loan: Use the following formula:
- Total Cost = (Loan Amount x APR for a personal loan) / 12 x Loan Term (in months), which reflects the interest rate on a personal loan.
- This calculation helps you understand the total amount you’ll pay back over the life of the loan.
- For example, if you’re borrowing $10,000 with an APR of 10% for 5 years, your total cost would be about $12,000. This means you’ll pay $2,000 in interest and fees over the life of the loan based on the APR for a personal loan.
Understanding how APR works empowers you to secure the best possible terms, but what practical steps can you take?
Practical Tips to Secure a Good APR
- Research Thoroughly: Learn about current market rates and the rules of different lenders. Use websites like Bankrate or NerdWallet to compare APR from various lenders. This helps you compare personal loans to find the best deal. Doing this research gives you a clear standard to compare personal offers and spot any unfair practices.
- Negotiate Terms: If you have a good credit score, a stable income, or have been with a lender for a long time, use these strengths to qualify for a personal loan. Many lenders are open to negotiation, especially for low-risk borrowers. If you have been loyal to your bank, ask them to match or do better than the rates offered by other lenders. Staying loyal can lead to better loan terms.
- Refinance When Possible: Refinancing your mortgage can be a smart way to take advantage of lower interest rates. If interest rates have dropped since you took out your current mortgage, refinancing to a new loan with a lower rate could save you a significant amount of money over the life of your loan.
Smart borrowing strategies ensure you always get the best deal.
Accounting Conservatism: The Real Estate Reality Check That Saves Investors From Costly Mistakes
Real estate investing has a way of making beginners feel like geniuses—at least on paper….
Bullet Repayment: Why That “Pay It All Back at Once” Clause Isn’t as Crazy as It Sounds
You are reading through your first term sheet for a potential investment property. You scan…
The “Maybe” Money: What is a Contingent Asset in Real Estate?
Imagine you are holding a lottery ticket. You have picked the numbers, paid your dollar,…
Why the Auditor’s Opinion Is the Most Important Page in Any Real Estate Deal
When you buy a physical property, you wouldn’t dream of closing the deal without a…
How to Buy the Dip in Real Estate Without Killing Your Cash Flow
“Buy low, sell high.” It is the oldest advice in the financial world. Whether you…
The “Bullish Abandoned Baby”: A Weird Name for a Powerful Real Estate Buying Signal
The “Bullish Abandoned Baby” sounds more like a tabloid headline or a parenting mishap than…
Close Position 101: Why You Haven’t Truly Won Until You Exit
In the world of finance, terminology can be a barrier to entry. This is especially…
The Lazy Landlord’s Secret: How Becoming a Bondholder Lets You Cash Rent Checks Without Owning Property
You entered real estate investing for the deeds, the keys, and the cash flow. You’re…
Credit Card Dumps: The Silent Threat That Can Kill Your Real Estate Deal
In real estate investing, timing is everything—and so is your credit. Imagine being days away…
The “On/Off” Switch: A Beginner’s Guide to Barrier Options in Real Estate Finance
Real estate investors spend a lot of time analyzing tangible things: occupancy rates, renovation costs,…
FAQ
What’s the difference between APR and interest rate?
APR includes the interest rate plus all associated fees, while the interest rate only reflects the cost of using the borrowed funds.
How does my credit score affect APR?
A good loan or credit card APR depends on your credit score. Higher scores get lower APRs because they show you’re a responsible borrower. Lower scores get higher APRs due to a higher risk of default, resulting in a less favorable interest rate on a personal loan.
Can I negotiate a lower APR with my lender?
Yes, in many cases, you can negotiate a lower APR with your lender. It’s always worth asking and demonstrating your creditworthiness or explaining any extenuating circumstances. Your credit score, payment history, income, and current market rates can influence your negotiation ability. Additionally, some lenders may offer lower APRs for automatic payments or if you have multiple accounts with them.
Is a variable APR better than a fixed APR?
A variable APR changes with market rates, causing fluctuating payments, which can be good if rates fall but risky if they rise. A fixed APR keeps payments constant, good for budgeting but without potential savings if rates fall. Choosing depends on risk tolerance and market predictions.
What’s the Difference Between APY and APR?
APY (Annual Percentage Yield) is used for savings accounts and reflects the annual rate of return, while APR is used for loans and the annual borrowing cost.
Why do lenders charge different personal loans rates?
Lenders charge different interest rates on personal loans based on factors such as borrower creditworthiness, loan amount, DTI ratio, income stability, lender risk assessment, business model, and prevailing economic conditions.
Conclusion
Understanding APR and using these strategies will empower you to make the best financial decisions. Don’t hesitate to take control of your borrowing today—compare offers, negotiate, and make sure you’re getting the best possible deal.
Empower yourself today and make informed financial decisions about loan payments that set you up for success.
