You may need a good to excellent credit score and a low debt-to-income ratio to get the best interest rate on a personal loan. Additionally, you'll need to look for offers from multiple lenders to see who will offer you the lowest rate and best terms.
Because personal loans are generally unsecured loans, your loan offers will depend on your finances and the lender's preferences rather than the value of your collateral. With this in mind, here are six steps that can help you get a low-rate personal loan.
1. Check Your Credit Report and Score
Start by checking your credit report and score to see where you stand. Creditors may review your credit report to better understand your loan repayment history, current debt obligations and whether you can afford another loan. Your credit score can also impact your loan's interest rate.
You can check your Experian credit report and score for free, and get free credit monitoring with notifications of important changes. If you see an error on your credit report that could negatively impact your loan offers—such as a misreported late payment—you can file a dispute to get the information verified, updated or deleted. With your free credit score, you'll get insights into what's helping and hurting your score the most.
2. Improve Your Credit Score
If you have an excellent credit score, it will likely already qualify you for lenders' best offers. You might not receive the best available offers based on other factors, but you don't need to focus on improving your credit score.
However, when your score is less than excellent, improving your credit score could help you qualify for better rates. There aren't many ways to do this quickly, but you can:
- Pay down credit card balances. Your credit card's balance relative to its credit limit—its credit utilization ratio—is an important factor in your credit score. The balance gets reported around the end of your statement period, which means you could have a high utilization ratio even if you pay your bill in full each month. Paying down your balance during the statement period and lowering your utilization ratio could improve your credit score.
- Add positive information to your credit report. You may be able to use a tool like Experian Boost®ø to add new, positive information to your credit report. Experian Boost adds your on-time payments for utility, telecom, rent and select streaming services to your credit report, and can help boost scores quickly.
- Make your bill payments on time. A late payment can hurt your credit score. Try to continue making all your minimum payments on time while working to improve your score.
If you currently have an account that's past due or in collections, bringing your account current or paying off the collection account may also help.
3. Pay Off Other Debts
In addition to your credit reports and scores, lenders will consider your debt-to-income ratio (DTI), a comparison of your monthly income and debt payments. They may also consider your other monthly obligations, such as a mortgage or rent payment.
Paying off a debt will eliminate the monthly payment from the calculation and decrease your DTI. Lenders may then be willing to offer you a larger loan and lower interest rate because it might be easier for you to afford your payments.
4. Increase Your Income
The other side of the DTI equation is your income. A raise, promotion or additional work might help you qualify for a larger loan and better rates. If that's not an option, also review what counts as income on the personal loan application. You may be overlooking some sources—such as investment income or a spouse's income—that you can include.
5. Consider a Cosigner
Some lenders let you apply with a cosigner. The person's credit and income can impact your loan offers, and they will also be responsible for repaying the loan if you fall behind on payments.
Ask someone who has good credit and a low DTI to increase the chances that the cosigner will help you get a lower interest rate. But also consider how the shared obligation could impact your relationship.
6. Compare Loan Offers
All else being equal, lenders may offer you different interest rates based on their goals. For instance, a lender that wants to increase their portfolio of loans to borrowers like you might offer lower interest rates to help attract new customers.
Lenders may also offer you different rates depending on the loan amount and repayment term you choose. Additionally, review the fine print to see if you have to meet certain requirements to qualify for the offered rate. For example, many lenders offer an interest rate discount if you sign up for automatic payments. If the lender is a bank, you may also need to have a bank account with the company to be eligible for the discount.
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How Do Lenders Determine Your Interest Rate?
Lenders will consider various factors to determine if they'll offer you a loan and the interest rates on your offers. Some of the factors include:
- Your credit history and score
- Your income, current debt payments and DTI
- Your history with the lender
- The lender's goals
- Current economic conditions
You can only control some of these factors. The others may depend on timing more than anything else, which is why shopping for a loan can help you find the best rate.
How to Find the Right Personal Loan for You
When comparing loan offers, you'll see the loan's annual percentage rate (APR) rather than its interest rate. The APR takes the loan's interest rate, repayment term and origination fees (if there are any) into account to show you the annualized cost of borrowing and help you compare loan offers.
The offer with the lowest APR might be best, but also consider the factors beyond the rate, such as:
- The origination fee: You might have to request a larger loan because the fee could be taken out of the loan's proceeds.
- The monthly payment: It may be easier to manage a low payment, even if it costs you more overall.
- The repayment term: The monthly payment will eat into your budget and could impact future loan applications until you pay off the loan.
- The total cost: You could also review the offers to see which will cost you the least overall.
In the end, the best personal loan might not be the one with the lowest interest rate. It depends on your goals and financial situation.
Get Matched With Personal Loan Offers
Comparing loan offers can take a lot of time if you have to fill out an application for prequalification with each lender. Instead, you can use a service that will shop for a loan on your behalf. Experian has a free comparison tool you can use to see offers from several lenders. Once you sign in, you can also get matched with the best offers based on your credit.