Low-interest personal loans are offered by banks, credit unions, and online lenders to the most creditworthy borrowers. These loans come with competitive Annual Percentage Rates (APRs), which are typically lower than the national average personal loan interest rate of 12.38% as of August 21, 2024.
Unlike other personal loans, to qualify for this low interest rate, you’ll need to significantly exceed the lender’s minimum requirements. These include:
- FICO credit score of 740 or higher (or 800 or higher for the best rates).
- Annual income above a certain annual threshold.
- Clean credit record.
- Established credit history.
How to get a low interest personal loan
While each lender has different standards and minimum requirements, following these seven steps will increase your chances of being approved for a low-interest personal loan.
1. Know your credit score
A good credit score will increase your chances of getting a lower interest rate on a personal loan, so before you apply, check your credit report to make sure your score is in tip-top shape and that there are no errors that could negatively impact your credit.
You can get free copies of your reports once a week from the three credit bureaus — Equifax, Experian, and TransUnion — by visiting AnnualCreditReport.com. If there are no errors on your report but your score could improve, make sure you bring any late accounts up to date and continue to make payments on your other accounts on time. It’s equally important to refrain from applying for new credit, since every hard credit inquiry will lower your credit score by a few points.
2. Pay off your debt
When you apply for a loan or credit product, lenders look at your debt-to-income ratio (DTI) to determine if you can afford your monthly payments. To calculate your DTI, add up all your monthly debts listed on your credit report (including credit cards, loans, and other regular debts) and divide it by your total monthly income. Your DTI is the final number, expressed as a percentage.
Generally, the higher your DTI, the higher your interest rate and the less likely you are to be approved, especially for a low-interest loan. Most lenders want a DTI below 36 percent. However, to get the best interest rate, you’ll probably want a lower DTI. If your DTI is higher than or close to 36 percent, consider some of the following ways to better manage your debt:
How to Lower Your DTI
- Follow the debt repayment strategy. The debt snowball and debt avalanche methods are ideal for people who have a steady income but have unmanageable monthly debts. Both methods require you to make the minimum payment on all your debts, but the debt snowball method focuses on your smallest debts first, while the debt avalanche method requires you to pay off the debts with the highest interest rates first.
- debt counseling. For those who don’t know where to start, credit counseling is a good option. Nonprofit organizations, banks, and some churches offer credit counseling, sometimes for free. You’ll be paired with a credit counselor who will take a detailed look at your financial situation. From there, they can guide you through potential solutions and relief. Some counselors will even negotiate debts with creditors on your behalf.
3. Explore all your options
Personal loans aren’t one-size-fits-all, and each lender has different offerings. Be sure to get pre-qualified for at least two loans before settling on the first one that looks good. Getting pre-qualified gives you a preview of the interest rates you might receive after submitting a formal application, but pre-qualification doesn’t guarantee approval.
However, not all lenders offer pre-qualification, so once you find a loan that seems like it might suit your needs, check the details and interest rates to make sure it fits your credit profile.
Also, check the opening hours of the customer service department and customer reviews to make sure you get the help you need throughout the entire process, from application to repayment.
If you don’t know where to start and are feeling overwhelmed, remember your options. Check out these:
- Online money lenders.
- Regional and national banks.
- Local and national credit unions.
- Online marketplaces like Bankrate.
4. Look for discounts
If you already qualify for the lowest interest rate offered by your lender, see if you can get additional interest rate discounts. Typically, these discounts will be between 0.25 percent and 0.50 percent of your interest rate.
The most common discount offered by lenders is the autopayment discount. Some lenders also offer discounts if you apply with a qualified co-borrower, if you have other types of accounts, or if you have retirement assets.
Also, check with your bank or credit union; some may be offering lower interest rates or special offers to existing customers, plus other perks like extended grace periods or shifting your monthly payment dates.
5. Apply for only the amount you need
You may be approved for a larger amount than you initially wanted, but you should only borrow what you need, so your monthly payments will be more manageable than if you borrowed a larger amount.
Run the numbers before applying and comb through the lender’s terms and conditions page to see if there are any fees. Some lenders may waive certain fees or charge lower fees to those with good credit, but be careful of origination fees, prepayment fees and late payment fees.
6. Consider a credit union
Credit unions are nonprofit organizations that provide banking solutions to their members. Credit unions often offer lower personal loan interest rates than traditional banks.
To work at a credit union, you must apply for membership. Some credit unions, like PenFed, have looser eligibility requirements, but others limit membership to individuals who work for certain employers, belong to certain organizations, or live in certain areas.
Some credit unions also offer membership to relatives of current members. Every credit union is different, so be sure to research all of your local options before applying to be sure you meet the minimum requirements.
7. Request a pre-approval
Most lenders allow borrowers to see interest rates through pre-qualification before officially applying for a loan, a step that requires providing contact information, estimated gross income, date of birth, and Social Security number.
The best thing about pre-qualifying for a loan is that you can find out exactly what kind of loan you can get from a particular lender without hurting your credit, as the lender only has to do a soft pull on this step. Get pre-qualified from at least three lenders to get a comprehensive idea of what kind of loan you can get.
How personal loan interest rates work
Lenders evaluate several factors, including your credit score, employment status, and debt-to-income ratio, to determine whether you qualify for a low-interest personal loan.
Credit scores play an important role as they tell lenders how well you have managed loans and other financial products in the past. FICO scores, which many lenders and creditors use to make lending decisions, range from 300 to 850. The lowest interest rates are usually given to borrowers with good credit scores above 800, as they are less at risk of defaulting on payments.
Although you may still be approved for a loan with a lower credit score, it may be more difficult, and you may be subject to higher interest rates and fees.
The average interest rate on a personal loan for a borrower with good credit is between 10.73 and 12.5 percent. But if your credit score falls into the average category (630-689), the average interest rate will be between 17.8 and 19.9 percent.
What to look out for when comparing low-interest personal loans
Once you understand how personal loan interest rates work and the terms most lenders require, the next step is to shop around for the best deal.
- Interest and fees. Look for the lowest starting interest rate and find out if there are any financing fees, underwriting fees or early repayment fees.
- Loan terms. Looking at different terms can help you plan both your monthly budget and the amount of interest you’ll pay overall. If you can make the monthly payments on a shorter term loan, lenders may offer you a lower interest rate.
- Online pre-qualification. Getting pre-qualified can help you compare options and avoid formally applying to lenders that aren’t a good fit.
- Customer service. 24/7 customer support, customer reviews on third-party sites, and the type of customer service offered can influence whether a lender is right for you. Also consider whether they have branches if you prefer in-person service.
- Lender incentives. Referral bonuses, discounted fees when you sign up for autopay, free access to your credit score, unemployment protection, etc. can all impact your overall borrowing experience.
Conclusion
A good credit score, a steady income, and a low debt-to-income ratio are key to scoring a low-interest personal loan, but if your financial situation isn’t so great, consider taking a step back to improve your credit score and lower your utilization rate before applying.
If you can’t wait and need the funds as soon as possible, you can also apply with a co-signer or sign up for an autopayment discount to get better terms. Most importantly, shop around for the low-interest personal loan that best suits your credit situation, get pre-qualified if possible, and compare your options before taking out a loan.
