Personal Loan Interest Rates: Facts & Figures

Shopping around for the best personal loan interest rates? Personal loans can offer an excellent alternative to higher-interest credit cards and allow you to consolidate debt, plan large-scale home makeovers, and finance other major expenses.

Personal loan interest rates currently range from 5 to 36 percent. The rates will vary depending on your credit score, the length of the loan, the amount you’re looking to borrow, and the lender you choose. Your current debt load will also factor heavily in the interest rate you receive.

Here’s a breakdown of the current average annual percentage rates (APR) for online personal loans, based on your credit score:

  • Excellent credit (720-850): 10.3%–12.5% APR
  • Good credit (690-719): 13.5%–15.5% APR
  • Average credit (630-689): 17.8%–19.9% APR
  • Poor credit (629 and lower): 28.5%–32% APR

Keep in mind that the APR includes the interest rate you’ll pay plus all other additional fees, such as origination fees.

What interest rates are offered by banks and credit unions?

Banks might offer competitive interest rates for personal loans, and additional incentives if you’re already a customer. However, you might have to supply above-average credentials to qualify for a bank loan—and banks typically take longer to fund loans than online lenders.

Credit unions tend to extend lower interest rates on personal loans than banks. As of September 2019, the average interest rate on an unsecured, fixed-rate 36-month loan was 9.41%, compared to 10.31% for banks, according to the National Credit Union Administration.

How do personal loan interest rates work with online lenders?

If your goal is to find a personal loan with the lowest possible interest rate, an online lender may be your best bet. Online lenders tend to offer lower interest rates than their brick and mortar competitors. Why? Because the low overhead from an online business allows them to pass on their savings to customers in the form of lower interest rates.

When you apply for a personal loan through Prosper, for instance, you’ll receive an interest rate that remains fixed throughout the lifetime of your loan. Checking your interest rate for a loan through Prosper results in a soft credit check, with no impact on your credit score. Interest rates for loans through Prosper currently range from 6.95–35.99% APR.

In contrast, some lenders extend variable rate loans, in which the interest rate may rise and fall depending on changes in the market.

Which factors influence your personal loan interest rate?

To determine personal loan interest rates, lenders evaluate a number of criteria including:

  • Your credit history and score, including any negative history, how long you’ve been using credit and any other recent inquiries
  • Your employment status
  • Your debt-to-income ratio, also known as the amount of debts you carry in proportion to your overall income

Although all of these play a part in the decision, the most important factor in determining your personal loan interest rate is your credit score. Some lenders may cater to those with poor credit but the interest rate will be steep to offset risk.

What else might determine the interest rate?

Your interest rate also might be higher if you’re requesting a larger loan or longer term. Since a longer-term or larger loan poses more risk to the issuer, your interest rate may be higher than it would be for a smaller or more short-term loan.

You can learn more about personal loans and how to apply here.

Read more: Everything You Need to Know About Personal Loans

Understanding your APR

When you’re shopping for a personal loan, the first thing you’ll likely want to know is what the interest rate will be. But when you’re figuring out the total cost of a loan, interest rates are just the beginning. They don’t tell you everything you need to know, because interest rates alone don’t take into account any fees you may be charged during the life of your loan. One good example is the origination fee, a one-time fee the loan provider charges for processing the loan.

Most lenders charge an origination fee. Some set a dollar amount, but lenders usually structure the fee as a percentage of the loan amount. For example, online lending platforms like Prosper.com charge origination fees that range from 2.41% to 5%. Your credit rating may determine the origination fee.

For example, if you borrow $5,000, you would be charged an additional $50 to $250 on top of the interest rate. Borrowing $10,000 would cost you between $100 and $500 in origination fees.  Depending on the loan product that you select, the origination fee may be taken out of the loan proceeds (borrow $10,000 and receive $9,500 in funds) or charged in addition to the proceeds (borrow $10,500 and receive $10,000 in funds).

The origination fee isn’t included in the interest rate, which can make it hard to know whether or not you’re paying it. To consider them together, you’ll need to understand your APR.

What is APR?

Your interest rate is determined by your creditworthiness, the length of the loan and other factors. Personal loans have a fixed rate, so your payments won’t fluctuate from month to month. Instead, you’ll be charged equal monthly installments.

But that’s not all of what you’ll be charged in order to borrow. APR, or annual percentage rate, provides a clearer picture of your loan’s true cost because it reflects your loan’s annual interest rate including all fees to originate the loan. Like the interest rate, APR is expressed as a percentage.

APR is a good way to compare loans from different loan providers and lending platforms so you can make apples-to-apples comparisons, even if you are quoted the same interest rate for different loans. In some cases, a loan with a higher interest rate but a low origination fee could end up costing you less because its APR is lower after factoring in the origination fee.

APR is a complicated mathematical formula, so it’s best to use an online calculator to run the calculation. To do so, you’ll need the following pieces of information:

  • Your loan amount
  • The length of the loan
  • Interest rate
  • Origination fee

Loan providers are legally required to provide you with both your interest rate and APR as part of any loan agreement.

Several ways to pay origination fees

The origination fee reimburses lenders for performing due diligence, like pulling your credit report and verifying supporting documents. Most personal loan providers charge an origination fee, but they don’t all charge it the same way.

Some require you to pay your origination fee right away by deducting it from your total loan amount. Let’s say you take out a $5,000 loan with a 2% origination fee, making that fee $100. At closing, you would only receive $4,900 because the lender would hold back $100 to pay the origination fee. However, you would be required to repay — and pay interest on — the full $5,000. In this case, it’s easy to see how much you’re paying because you do not receive the full amount of the loan.

Other loan providers add the origination fee to your loan total. Using the same example, if you wanted to borrow $5,000, you would be required to repay $5,100 plus interest, which would result in slightly higher monthly payments than the upfront method.

You may prefer one method or the other, depending on your circumstances. Paying off the origination fee over the life of the loan may be easier to handle given other constraints in your budget. You may not have enough funds on hand to pay the fee upfront, which may be the very reason you are taking out a personal loan in the first place.

On the other hand, you might object to the higher borrowing cost associated with rolling the origination fee into the loan amount, and you may prefer to pay the fee upfront and not owe additional interest.

Take the time to research how your loan provider approaches origination fees. If you need to borrow an exact amount, you may end up coming up short if your loan provider deducts the fee from your loan total. In that case, consider borrowing more to make sure you’re covered.

There’s no such thing as a free lunch

Many lenders tout “no fees,” but it’s important to remember you are still being charged by the lender for the loan. Whether you’re paying the origination fee over time or whether it comes out of your loan total at closing, you’re still paying the fee. When the fee is rolled up into the loan amount, it can obscure the fact that an origination fee is being charged, but it’s still there in the form of higher monthly payments.

Comparing the APR for different loan options gives you the transparency you need in order to determine which loan is best for you.

Because there’s no such thing as a free lunch, make sure you understand what the origination fee is and how you must pay it.

Only then can you best decide which repayment method makes the most sense for you and your unique circumstances.

What Higher Interest Rates Mean for You

Last month the Federal Reserve announced plans to raise short-term interest rates to between 0.25% and 0.5%—a move that affects millions of people’s lives.

The good news for consumers is that this is a small hike. If you have no or low debt, the rate hike probably won’t affect you significantly. But the average U.S. household, which carries $15,355 in credit card debt, has already been impacted by higher monthly interest rates.

At Prosper Marketplace, we’re dedicated to helping people achieve financial well-being, so we wanted to understand how consumers felt about the hike. We surveyed more than 500 Americans about the rate increase and found that nearly half of respondents didn’t know that rates had gone up.

In other words, our survey suggests many Americans are totally unaware of the recent Fed interest hike, which means they’re actually paying more for their previous debts — as well as for future purchases they make with a credit card — without realizing it.

Why the Fed Decided to Raise Interest Rates Now:

In 2008, the Fed lowered short-term rates to nearly zero as a response to the financial crisis. Now that the U.S. economy has rebounded and job rates are nearly back to 2007 levels, the Fed has decided to begin gradually raising rates to increase inflation to healthy levels (about 2% per year) and protect against future risk.

These higher short-term interest rates also affect individual consumers.

How Higher Short-Term Interest Rates Could Affect You in 2016:

If you have credit cards, your interest has already gone up

Now that short-term interest rates have gone up, so has the average interest on credit cards. The credit card interest is now  the highest rate in three years, meaning everyone with credit card debt is now paying more for their previous purchases.

It’s always in consumers’ best interest to consolidate high-interest debts if it means paying less in fees and interest. Consolidating high-interest debt via a marketplace lender, such as Prosper, can help save consumers money because rates are often lower than a credit card.

Your savings accounts won’t see much benefit

With higher interest on credit card debt, it may seem like individual savings accounts would see higher interest as well. With recent interest on personal savings accounts being so low—typically less than 1%—higher interest on savings would motivate consumers to save. While the higher short-term rate will likely trickle down to personal savings accounts, the increase is small enough that it won’t have much effect on most people’s savings.

Mixed news on mortgages

Home mortgages are a major source of debt for many Americans. Those who already have fixed-rate mortgages won’t see any rate increases. However, variable-rate mortgages will see higher interest rates as will new mortgages of any kind.

Loans may be easier to get—but check those interest rates

Higher interest rates mean that debts are getting more expensive, whether it’s a $5 latte on a credit card or $50,000 to make home improvements. Higher interest rates also means that banks may be more willing to issue credit. While lending has rebounded to a certain extent since the financial crisis, credit has remained limited in some areas.

Don’t jump the gun, though. Remember—interest rates have just gone up. Loan seekers should still shop around for the most competitive rates, which may not be offered by traditional banks.

Foreign travel and goods could get cheaper

The Fed’s goal for carefully controlled inflation could make for a stronger dollar—as long as other major economies don’t tighten their economic policies. That means that U.S. travelers abroad could benefit from more favorable exchange rates. It would also mean that certain foreign imports could get cheaper.

The bottom line is that the Fed’s recent interest rate hike won’t have a major impact on your finances unless you have a high balance. That said, regardless of how much debt you have, the changes that happen on a macroeconomic scale affect all of us to some extent. The more you know about how these changes impact you, the better you can plan for financial well-being.