Are you looking at lenders to compare personal loans? You may be trying to gauge a reasonable personal loan interest rate. However, other factors and rates can affect the cost of your loan.
You may need to consider your credit score, debt-to-income ratio, loan terms, and other loan fees that come into play.
This article will help you understand the factors you should consider to get the best personal loan you can afford.
The Average Interest on a Personal Loan
According to 2021 data, the average interest rate of a personal loan is 10.41%. This rate can vary from 6% to 36%, depending on your credit score and financial history.
Personal loans allow you to borrow money for significant expenses such as home renovations or consolidating high-interest debts. In most cases, the interest rates of personal loans are lower than credit cards which are at around 17% as of November 2019, according to the Federal Reserve.
Factors That Affect Your Interest Rates
Your loan application will be reviewed by the lender processing your application. Based on the information in your application, they will determine how risky your loan will be. This will lead to different rates.
Here are the factors that you need to consider when comparing personal loans:
- Credit Score: Your credit score is the main factor that determines your interest rates. In general, the higher your credit score, the lower your interest rates. If you have no credit or have a thin credit history, you may be required to pay higher interest rates than those with a good credit history. It is best to keep a higher credit score as close to 850 as possible.
- Debt-to-Income Ratio: This ratio is calculated by dividing your monthly debt payment by your gross monthly income. This debt may include your student loans, credit card bills, auto loans, mortgages, and other personal loans, if any. The lower your ratio is, the better it is for you. Lenders are more likely to offer lower rates to people with a lower debt-to-income ratio.
- Cosigner: If you can’t qualify for a personal loan by yourself or if you want to lower your interest rate, a person with a good credit history who is willing to cosign your loan may be able to get you a better rate.
- Loan Terms: The loan term or the duration you will be repaying your loan will also affect your interest rate. You should be wise when choosing a loan term as longer loan terms tend to have higher interest rates despite the lower monthly payment.
Do Personal Loans Affect Your Credit Score?
Personal loans will appear on your credit report when you get approved for your loan. These loans can help you improve your credit score if you pay the loan back on time. The longer you have this loan, the better it will be for your credit history.
However, if you do not pay back the loan, your credit score can drop by as much as 100 points or more, even if it is a small loan. This can limit your access to other forms of credit and favorable terms.
If you have several debts or loans, it is best to consolidate your debts into one loan and pay off the loan as soon as possible.
The interest rates on a personal loan can vary depending on several factors. It is best to research to find a lender that offers the best personal loan interest rates for your circumstances.
Are you looking for ,installment loans in Center Point, AL? We at Parkway Finance Company offer a variety of personal loan sizes to fit your needs. Apply for a loan today!