As of October 18, 2021, the average three-year unsecured personal loan rate is 8.95%, according to S&P Global.
Personal loan rates over the last year
The rates on personal loans have been steadily decreasing over the past 12 months. Todd Nelson, senior vice president of strategic partnerships at LightStream, said the falling interest rates are influenced by a number of factors, and as the cost of lending decreases, so do interest rates.
One barometer of the cost of lending is the federal funds rate, the rate at which commercial banks borrow and lend their reserves to each other. The rate has been low since March 2020 to combat the economic impact of the pandemic, and this can impact short-term rates on consumer loans.
Now might be a good time to lock in a solid rate on a personal loan.
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What is a personal loan?
If you're strapped for cash and need to borrow a lump sum to pay for things like home renovations, debt consolidation, or medical bills, personal loans provide a quick influx of money. You can get a personal loan from banks, credit unions, and various online lenders. You'll take out a set amount of money at a defined term length and interest rate and repay that money in monthly installments.
Your loan's interest rate will depend on your credit score and other financial factors. In some cases, you can get your money as fast as the same day you agree to the loan terms. Some personal loans may charge fees, like late payment penalties and origination fees, but the best personal loans come without fees.
What is an interest rate?
An interest rate is essentially the fee you pay for borrowing money, listed as a percentage of your loan amount. Personal loans almost always have fixed interest rates, though it's possible to find personal loans with variable interest rates. Fixed interest rates don't change over the life of the loan, while variable interest rates are altered at regular intervals. In addition to the payments you make toward your loan balance each month, you'll also pay interest on that principle.
For example, if you have a $5,000 loan with a 10% interest rate and a three-year term, you'll cough up $5,808 over the life of your loan — $808 of which is solely interest. The higher your interest rate, the more you'll pay in total.
Can you spend a personal loan on anything?
You can use a personal loan for many purposes, though some expenses, like educational costs, aren't usually covered. Here are some examples:
- Debt consolidation
- Credit card refinancing
- Medical bills
- Home improvements
- Moving expenses
- Major purchases
- Vacations (though read our explainer on why you shouldn't take out a personal loan for vacation first)
- Special occasions
- Baby and adoption
This list isn't exhaustive by any means. Check with your lender to find out whether your reason for taking out a personal loan is acceptable.
Are personal loans bad for your credit?
Much like a credit card or a student loan, payments (or non-payments) may be reported to credit bureaus and will likely impact your credit score. However, they won't damage your credit as long as you make your monthly loan payments in full and on time. If you do, you may actually improve your credit score as a result because you'll have a longer history of consistent payments.
A personal loan can also help diversify your credit mix, which may boost your score. A personal loan is an installment loan, meaning you pay it off in regular intervals, which is different than revolving credit, like credit cards. A healthy balance of these types of credit is beneficial for your credit score.
Checking your rates with most companies will not impact your credit score because most lenders only generate a soft credit inquiry when showing you personalized rates. However, if you choose to accept a loan, lenders will likely conduct a hard credit inquiry that may negatively affect your credit score. A hard inquiry offers a lender a comprehensive look at your credit history. Too many inquiries on your credit report — particularly within a short amount of time — might also have a negative effect.
How to get a good personal loan interest rate
The interest rate on your personal loan depends on many financial factors, including your income and what other debt you have. The most important component is probably your credit score. Here are a few tips to improve your credit score:
Request and review a copy of your credit report. See if there are any mistakes on your report that could be damaging your score. If so, contact the credit bureau to talk about fixing the error.
Keep credit card balances low. Maintaining a credit utilization rate — the percentage of your total credit you're using — of 30% or less will show lenders that you can manage your credit well.
Create a system for paying bills on time. Your payment history makes up a large percentage of your credit score, and lenders like to see steady and reliable payments in the past. Set up calendar reminders or automatic payments so you don't fall behind.
You should shop around with different lenders to see which one offers you the best terms. The first lender to offer you a personalized rate isn't always the best.
Is a personal loan a smart choice for you?
If you need a lump sum of money fast, a personal loan may be an excellent option for you. A personal loan can help you immediately cover an expense and help you spread the cost over a longer stretch of time. You may also be able to get a lower interest rate on a personal loan than you would with a credit card.
However, if you're already carrying a significant amount of debt, a personal loan may just add to your stress. The overall cost of whatever you're spending the money on, be it a home improvement or medical bills, will end up being more expensive in the long run because you'll have to pay interest on the money you take out. If you have the flexibility, saving up money for your expense is likely a better choice.
Keep in mind that if you fall behind on payments, the loan can damage your credit score, making a lender less likely to give you money in the future.
Source : https://www.businessinsider.com/personal-finance/best-personal-loan-rates-for-october-10-20211380