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Best interest rates for personal loans
Personal loans are the fastest-growing debt category, increasing by about 12% per year since 2015.
The reason for this is partly due to the rise of fintech and peer-to-peer lending companies, which have made it much easier and cheaper to access these loans.
Personal loans, which are installment loans, are repaid regularly over a set period of time. In addition to having lower interest rates than credit cards, personal loans can be used to finance nearly any kind of expense, from home renovations to relocation.
They’re not free money, however. In the latest Federal Reserve data, the average APR for personal loans is 9.34%. However, credit card rates are around 16.43%.
As we compiled the best personal loans list, Select evaluated dozens of lenders. Aside from examining key factors like interest rates and fees, loan amounts and term lengths, we also looked at how funds are distributed, autopay discounts, customer service and how fast you are able to receive your funds.
Select’s picks for the top five personal loans
- Best overall: LightStream Personal Loans
- Best for debt consolidation: Marcus by Goldman Sachs Personal Loans
- Best for refinancing high-interest debt: SoFi Personal Loans
- Best for smaller loans: PenFed Personal Loans
- Best for next-day funding: Discover Personal Loans
How do personal loans work?
best interest rates for personal loans
Loans for personal use can provide a more affordable way to finance your life’s big expenses. With a personal loan, you can fund a variety of expenses, such as home renovations, weddings, travel, and medical expenses.
You should have a plan in place before you take out a loan. Consider how much you need, how many months it will take to repay it comfortably, and how you will budget for the new monthly expense.
The typical loan term is between six months and seven years. The longer the term, the lower the payments, but they usually also come with higher interest rates, so it’s best to opt for the shortest term you can afford. Consider how much interest you will pay overall when choosing a loan term.
When you’re approved for a personal loan, the money is usually deposited directly into your checking account. If you request a debt consolidation loan, your lender may be able to pay directly to your credit card companies. Any extra cash remaining in your account will be credited back to you.
A monthly loan bill includes your installment payment plus interest charges. Make sure you check with the lender whether there is a penalty for paying off your loan early.
When you make extra payments to pay down your debt faster, lenders often charge you a fee because they lose out on the potential interest.
A flat rate may apply, or you may be charged a percentage of your loan amount or the rest of the interest you owe. We did not find any lenders who impose penalties for early repayment.
The lender typically requires you to pay back your loan in monthly installments after you receive the funds from your loan.
Your credit line closes once you have paid off your personal loan.
What is a good interest rate on a personal loan?
The APR of most personal loans is fixed, so your payment stays the same for the life of the loan. In some cases, you can take out a variable-rate personal loan. Make sure you’re comfortable with the idea of your payments changing if rate changes occur.
Fed statistics indicate that personal loan APRs average 9.34%. Conversely, the average interest rate charged by credit cards is 16.43%.
In light of the fact that the average rate of return on the stock market is typically above 5% after adjusting for inflation, a personal loan with a low interest rate would make sense.
In that case, you know that you could still earn more than what you’re paying in interest.
Nevertheless, getting a personal loan with an APR below 5% is not always easy. Your interest rate is determined by your credit score, credit history, income and other factors, such as the loan’s size and term.
How is my personal loan rate decided?
When you are looking for low-interest loans or credit cards, keep in mind that banks seek reliable borrowers who make timely payments. Financial institutions consider your credit score, income, payment history, and, in some cases, cash reserves when determining what APR to give you.
Before you can be approved for any credit product (credit card, loan, mortgage, etc.), you must fill out an application and consent to the lender pulling your credit report. By doing this, lenders can determine how much debt you owe, how much you pay each month, and how much additional debt you can take on.
Depending on your application, you may qualify for a range of loan options. They will each require a different amount of time to pay back the loan (the term) and a different interest rate.
Interest rates are determined based on factors such as your credit score, credit history, income and loan size and term. In general, longer-term loans have higher interest rates than those paid back over a shorter period of time.
Now you can get matched with a personal loan offer without damaging your credit score using Select’s widget.
What is a loan term?
A loan’s term is the amount of time you have to pay off the loan. Usually loans have terms of six months to seven years. Typically, the longer the term, the lower the monthly payments and the higher the interest rate.
How big of a personal loan can I get?
Several lenders offer loans ranging from $500 to $100,000. Make sure you can afford to repay the full amount of the loan plus interest before applying for the loan.
How much do personal loans cost?
The lenders on this list do not charge origination fees. Throughout the term of the loan, you will pay interest on personal loans. If you pay off your loan early with one of the lenders on our list, you will not be charged interest, so you can save money by making bigger payments.
Common personal loan definitions you should know
Before applying for a personal loan, you should know some common terms.
Co-applicants or joint applications
Co-applicants are people who help you qualify by attaching their name (and financial details) to your application. It is possible for a co-applicant to be a co-borrower or co-signer. Co-applicants can be helpful when your credit score isn’t so high, or if you are a young borrower without much credit history. Your co-applicant might qualify for a lower APR and/or a bigger loan if they have a good credit score. The credit scores of both applicants will be impacted if you don’t repay the loan, so make sure that your co-applicant feels comfortable sharing financial responsibilities with you.
Co-signers
A co-signer agrees to help you qualify for the loan, but they are only responsible for making payments if you are unable to pay. It is not the co-signer who receives the loan, nor does it matter what it is used for. However, if the main borrower defaults or misses payments, the co-signer’s credit will be negatively affected.
Co-borrower
A co-borrower is responsible for repaying the loan and deciding what to do with it, unlike a co-signer. Co-borrowers usually have a say in how the loan is used. A lender will only consider two co-borrowers who share a home or business address, as this indicates that they are sharing the responsibility of the money in a positive way. If either co-borrower stops making payments or defaults, both credit scores are affected.
Direct payments
If you select debt consolidation as the reason for taking out a personal loan, some lenders offer direct payments. You receive direct payments from your lender, who pays your creditors directly, then deposits any leftover funds into your checking or savings account. Keep making payments until the balance on your account is completely paid off so that you don’t incur any additional late fees or interest charges.
Early payoff penalty
Look into whether the lender charges an early payoff or prepayment penalty before accepting a loan. The lender expects to be paid interest for the full term of the loan, so they will charge you a fee if you pay your debt down more quickly. The fees could be calculated as either the remaining interest you would have owed, a percentage of the balance, or a flat rate.
Origination fee
The origination fee is a one-time upfront charge that your lender subtracts from your loan to cover administration and processing costs. There is usually a flat fee of 1% to 5%, but sometimes there is no fee. As an example, if you borrowed $20,000 and the origination fee was 5%, you would only receive $19,000 when the funds arrived. In this case, the lender would receive $1,000 off the top. However, you’d still be required to repay all $20,000 plus interest. Whenever possible, you should avoid paying origination fees. You can qualify for loans that don’t have origination or administration fees with a good or excellent credit score.
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