How to get a personal loan with low interest rates

Low-interest personal loans are offered by banks, credit unions and online lenders to the most creditworthy borrowers. They come with competitive annual percentage rates (APRs) — usually below the national average personal loan rate of 12.42 percent as of Sept. 18, 2024.

Unlike other personal loans, you’ll likely need to well exceed the lender’s minimum requirements to qualify for rates this low. This could include:

• A FICO credit score above 740 (or 800 for the very best rates).
• An annual income above a certain yearly threshold.
• A clean credit record.
• An established credit history.

How to get low-interest personal loans

While every lender has different standards and minimum requirements, you could increase your chances of getting approved for a low-interest personal loan by following these seven steps.

1. Know your credit score

An excellent credit score gives you the best chance of receiving a low interest rate on a personal loan. Before applying, check your credit report to ensure your score is in the best shape and that no errors negatively affect your credit.

You can get a free copy of your reports once a week from all three credit bureaus — Equifax, Experian and TransUnion — by visiting AnnualCreditReport.com. If there aren’t any mistakes on your report but your score could improve, try to get any past-due accounts current and continue making timely payments on all your other accounts. Refraining from applying for new credit is equally important since each hard credit inquiry dings your credit score by a few points.

2. Pay down debt

When you apply for a loan — or any credit product — lenders will look at your debt-to-income (DTI) ratio to determine whether you can afford your potential monthly payment. To calculate your DTI, add up your monthly debts that appear on your credit report — including credit cards, loans and other regular debts — and divide that by your gross monthly income. Your DTI is the final number, expressed as a percentage.

In general, and especially with low-interest loans, the higher your DTI, the higher your rates are likely to be and the lower your approval odds are. Most lenders look for DTIs under 36 percent. However, yours will likely have to be lower to get the best rates. If your DTI is higher than 36 percent — or is getting close to it — consider some of the following methods to help you better manage your debt.

Ways to lower your DTI

• Follow debt repayment strategies. The debt snowball and debt avalanche methods are ideal for those with a steady income but unmanageable levels of monthly debt. Both require that you make the minimum payment on all of your debts, but the snowball method involves focusing on the smallest debts first, while the avalanche method requires you to pay down the debts with the highest rates first.
• Debt counseling. Credit counseling is a good option for those who don’t know where to start. Nonprofit organizations, banks and some churches offer credit counseling, sometimes for free. You’ll be paired with a credit counselor who will dive into your financial situation. From there, they’ll guide you through potential solutions and relief methods. Some counselors can even negotiate your debts with creditors for you.

3. Research all your options

Personal loans aren’t a one-size-fits-all product, and each lender has something different to offer. Before settling for the first one that looks good, prequalify for at least two loans. Doing this lets you preview rates you could receive after submitting a formal application, though prequalifying doesn’t mean guaranteed approval.

However, not every lender offers prequalification. If you come across a loan that seems to meet your needs, research the details and rates to ensure it’s competitive for your credit profile.

Also, review the customer service department hours and the customer reviews. Make sure you’ll have the support you need throughout the application and repayment process.

If you aren’t sure where to start and are feeling overwhelmed, remember your options. You can check out:

• Online lenders.
• Local and national banks.
• Local and national credit unions.
• Online marketplaces, like Bankrate.

4. Look for discounts

If you already qualify for the lowest rate the lender offers, see if you could get any additional rate discounts. Often these discounts will be between 0.25 percent and 0.50 percent of your rate.

The most common discount lenders offer is the autopay discount. Some lenders also offer discounts for applying with a qualified co-borrower, for having another type of account with them or for having retirement assets.

Also, check with your bank or credit union. Some offer rate reductions or benefits for existing customers. Plus, you may be offered other perks, like an extended grace period or the ability to change your monthly due date.

5. Only apply for the amount you need

It’s possible that you may get approved for a greater amount than what you were originally looking for. However, you should only borrow what you need. By doing so you’ll be able to have a more manageable monthly bill than if you borrow a higher amount.

Crunch the numbers before you apply and comb through the lender’s terms and conditions page to look for any fees. While some lenders may waive specific fees or charge lower fees for those with excellent credit, be on the lookout for origination, prepayment and late fees.

6. Consider credit unions

Credit unions are nonprofit organizations that exist to provide banking solutions to their members. Their personal loan rates are often lower than you’ll find with traditional banks.

You’ll need to apply for membership to work with a credit union. While some — like PenFed — may have easier qualification requirements, others may restrict membership to individuals who work for a specific employer, are affiliated with a particular organization or live in a specific area.

Some credit unions also extend membership to relatives of current members. Every credit union is different, so look into all of your local options before applying to ensure that you meet the minimum requirements.

7. Apply for prequalification

Most lenders allow borrowers to check their rates through prequalification before formally applying for a loan. For this step, you’ll need to provide your contact information as well as your estimated gross income, date of birth and Social Security number.

The best part about prequalifying for a loan is that you’ll know exactly what you may be eligible for with that specific lender without hurting your credit, as lenders only need to do a soft pull for this step. Prequalify for at least three lenders to get a well-rounded idea as to what you could qualify for.

How personal loan interest rates work

Lenders evaluate several factors to determine if you qualify for a low-interest personal loan, including your credit score, employment status and debt-to-income ratio.

Your credit score plays a significant role because it informs lenders how well you managed your loans and other financial products in the past. FICO scores, which many lenders and creditors use to make lending decisions, range from 300 to 850. The lowest rates are generally reserved for borrowers with excellent credit scores of over 800 since the risk of defaulting on payments is lower.

You could still get approved with a lower credit score, but it may be more difficult. You can also expect a higher interest rate and more fees.

The average personal loan interest rate for borrowers with excellent credit is between 10.73 percent and 12.5 percent. But if your credit score is categorized as average — or 630 to 689 — the average rate is between 17.8 percent and 19.9 percent.

What to look for when comparing low-interest personal loans

Once you understand how interest rates on personal loans work and what most lenders require, the next step is to shop around for the best deal.

• Interest and fees. Look for the lowest starting interest rate and check whether there are origination fees, underwriting fees or early repayment fees.
• Loan terms. A variety of terms will help you plan out both your monthly budget and how much interest you pay overall. If you can afford the monthly payment on a loan with a shorter term, the lender may offer you a lower interest rate.
• Online prequalification. Getting prequalified can make it easier to shop around and avoid formally applying with lenders that aren’t a good fit.
• Customer service. Customer support 24/7, customer reviews on third-party sites and the types of customer service offered may influence whether the lender is a good fit. Also consider whether there are branches available if you favor in-person service.
• Lender incentives. Referral bonuses, discounted rates for enrolling in automatic payments, free access to your credit score or unemployment protection may all influence the overall borrowing experience.

The bottom line

An excellent credit score, consistent income and low debt-to-income ratio are key to securing a low-interest personal loan. But if your finances aren’t in the best shape, consider taking a step back to improve your credit score and lower your utilization rate before applying.

If you can’t wait and need the funds as soon as possible, you can also try applying with a co-signer or signing up for an autopay discount to get a better deal. Most importantly, shop for the best low-interest personal loan for your credit situation, prequalify when possible and compare your options before taking out a loan.