Interest rates on personal loans have steadily increased since early 2022, coinciding with the Federal Reserve’s efforts to curb inflation by raising the federal funds rate.
But anticipated Fed rate cuts before the end of this year may not bring personal loan rates down right away.
“Typically, we don’t see personal loan rates drop as a result of those rates dropping,” said Jean Hopkins, director of consumer lending at WeStreet Credit Union in Tulsa, Oklahoma.
Changes to the federal funds rate have a greater impact on variable-rate credit products, such as credit cards or home equity lines of credit, she said. Personal loan rates, on the other hand, are driven by larger economic factors, such as inflation and unemployment.
Your exact personal loan rate is most influenced by your creditworthiness and income. If you’re planning to borrow this year, here are a few things you can do to get a low rate on a personal loan.
Maintain a high credit score
Lenders rely heavily on credit scores to determine how likely an applicant is to repay a loan. Generally, those with high scores get the lowest rates.
“If you have a high credit score, banks think that you’re a good risk to take,” says Spencer Betts, certified financial planner at Massachusetts-based Bickling Financial Services.
He says borrowers should check their credit report before applying for a personal loan and take note of any past-due credit accounts or accounts you don’t recognize, which could indicate identity theft.
Potential borrowers looking to maintain or boost their credit scores should make on-time payments toward credit cards and other loans, Hopkins says, because payment history is the most important factor in your credit score calculation. She also says borrowers should maintain a low credit utilization, which is the percentage of available credit you’ve used on revolving accounts like credit cards.
“Make sure if you’re borrowing money on credit cards that you’re not borrowing more than, say, 30% or 40% of your balance on that line of credit,” she says.
Keep a low debt-to-income ratio
Another factor lenders consider when underwriting a personal loan is the percentage of your monthly income that goes toward debt payments.
“You want to make sure your debt-to-income ratio is low,” says Jen Hemphill, a Kansas-based accredited financial counselor and host of the Her Dinero Matters podcast. “The lower it is, you’re going to have a better chance of a lower interest rate.”
Debt-to-income ratio, or DTI, is calculated by dividing your total monthly debt payments by your monthly income. Multiply that figure by 100 to get the ratio expressed as a percentage. Hemphill suggests keeping your DTI around 30% or less, though some lenders will accept higher ratios.
If your DTI is high, consider paying down debt before applying for a personal loan for a chance at a better rate.
Hopkins suggests paying off smaller debts first to quickly eliminate those monthly payments and consequently lower your DTI.
Raising your income — which would also lower your DTI — may be a difficult task, but be sure to include all sources of income on a loan application. Many lenders count alimony, child support and Social Security payments when calculating DTI. You might even be able to include a partner’s salary as household income.
Compare offers to find the best deal
When you’re preparing to apply for a personal loan, it pays to compare offers from multiple lenders. Each lender has its own qualification requirements and underwriting process, so you could get a different APR from one lender to the next.
You can compare costs by pre-qualifying online. This process lets you preview your potential APR, monthly payment, loan amount and repayment term with only a soft credit pull, so your credit scores won’t be affected.
Pre-qualifying gives you “an idea of what interest rates are available for you based on your own situation,” Hemphill says. “That helps you shop around.”
She suggests paying special attention to the repayment terms you’re offered and how they affect the amount of interest you’ll pay over the life of the loan. Long terms may be appealing because they lower your monthly payment, she says, but they increase the total cost of the loan.
You can use a personal loan calculator to see how the given loan amount, term and interest rate affect monthly payments and interest costs.
If you have two competitive loan offers, compare perks and features to determine which is the right fit for your plans, Hemphill says. For example, some lenders provide a rate discount for setting up autopay or for having the lender directly pay off your other debts when you get a debt consolidation loan. Others may provide credit-building assistance so you can boost your score while you repay the loan.
