You’ve probably seen the low personal loan rates advertised recently, and might be wondering: How do I get that personal loan for 5-6%, or could I even get that? Or maybe you’re simply just curious: What is a personal loan anyway? (Answer: A personal loan is a loan issued by an online lender, bank, or credit union, usually in a lump sum amount ranging from about $1,000 to $100,000.) Here’s what you need to know to figure out if a personal loan might be right for you, and if so, how to get a low rate on one.
Pros and cons of personal loans
The first thing to remember, even before we talk about how to get a low rate, is that these loans have pros and cons. One big advantage of personal loans is that they often fund quickly, sometimes in a day or two, and may have lower interest rates than a credit card. But they also typically have higher rates than home equity loans or home equity lines of credit, and for those with poor credit, rates can hit a whopping 30%. This MarketWatch Picks guide will give you the 101 on personal loans and who they do, and do not, make sense for.
How to get the best rate on a personal loan
In general, a credit score of 740 or above will help you get the best rates and terms on a personal loan, says Ted Rossman, senior industry analyst at Bankrate. “It’s sometimes a little lower and sometimes a little higher, but we’re generally talking mid-700s and above for the best terms, which for a personal loan are in the 5% to 6% range,” says Rossman.
And that’s not all: “Lenders look at more than your credit score when deciding your personal loan rate. Your income, other existing debts, cash flow and employment are all common factors that help a lender decide whether you qualify and what rate to give you,” says Annie Millerbernd, personal loan expert at NerdWallet.
As a general rule, the absolute lowest rates are often reserved for the very best-qualified borrowers, which means not everyone will get a super low rate. “Personal loan rates are tailored to a borrower’s specific situation and what lenders consider worthy of a low rate can vary, which is why it’s so important to compare,” says Annie Millerbernd, personal loan expert at NerdWallet.
How to apply for a personal loan
Compare multiple offers from both online financial institutions and local banks or credit unions, says Rossman. “Often, the best deals tend to be offered by fintechs who focus online. That said, you might find better terms at a local bank or credit union, so it’s always a good idea to shop around. I’d bet that a credit union or community bank is more likely to offer a lower rate than a major national bank,” says Rossman.
For personalized comparisons, Millerbernd recommends pre-qualifying with multiple lenders to see what each can offer. “Pre-qualifying doesn’t hurt your credit score and can show you which lender may get you the lowest personal loan rate,” says Millerbernd.
With several lenders offering personal loan rates in the mid-single digits, it’s not necessarily hard to find one advertised. “What’s more difficult is qualifying. Just because lenders offer those low rates to some customers doesn’t mean that everyone will qualify — for instance, if your credit score is lower or your income isn’t as high as they’d like, you could be denied or offered a higher rate,” says Rossman.
