Improve your chances of approval by following these steps. (iStock)
If you are in a hurry and need money quickly, you can consider taking out a personal loan. Personal loan interest rates are near historic lows. And they offer flexibility – you can apply for different loan amounts and use the funds at your discretion.
However, finding the best personal lender and a personal loan rate that suits your needs will take time. Fortunately, online marketplaces like Credible make the process easier. With Credible, you can compare rates and find a lender online in minutes.
As you begin the process of comparing rates and terms, you may want to understand why personal loan interest rates matter and why now is the right time to get a personal loan.
What is a good interest rate on a personal loan?
Typically, a good interest rate on a personal loan is below the national average – currently it’s around 9.5%. But this number fluctuates.
For example, interest rates were 9.5% for a 24-month personal loan from a commercial bank in May 2020, according to the Federal Reserve. In May 2019, the average rate was 10.63%.
The coronavirus pandemic prompted the government to cut the federal funds rate to near zero in March 2020 to help the economy. This decision has had an impact on the way banks set the terms of their fixed interest rate and variable interest rate loans.
According to Credible, personal loan interest rates currently range from 4.99% to 35.99%. But with Credible’s free online tools, you can find different terms and rates starting from 4.99% APR in just 2 minutes. Checking rates won’t affect your credit and there are no hidden fees.
EVERYTHING YOU NEED TO KNOW ABOUT PERSONAL LOANS
How do I get approved for a personal loan?
Unlike a car or home loan, personal loans are unsecured and lenders will look closely at certain financial factors when making their approval decision and setting the terms of your loan. Increase your chances of getting your loan application approved by improving these three things:
- Credit score
- credit history
- Debt ratio (DTI)
1. Credit score: One of the most critical factors will be your credit score or FICO, which measures your financial history and helps lenders assess their risk in lending you money. Lenders prefer borrowers with higher scores. A good credit score will range from 700 to 749, and an excellent score is 750 and above. Borrowers with fair credit, which is a score ranging from 640 to 699, can still be approved but will likely pay a higher interest rate.
For a personal loan of $100,000 or more, you will likely need to have a credit score of at least 720. To see if your credit score is good enough to qualify for a personal loan, simply enter your estimated credit score in Credible’s free tools. , as well as the amount of your loan.
2. Credit history: Your credit score is partly based on your credit history. A credit score is assigned by one of three credit bureaus and is calculated based on your payment history, amounts owed, length of credit history, credit mix and new credit.
3. Debt to income ratio (DTI): Another factor a lender will consider is your debt ratio. This ratio is calculated by adding up your total debt payments, including credit card bills, car and student loans, mortgage payments and personal loans, and dividing the number by your gross monthly income. Lenders prefer borrowers who have a DTI of less than 40%, indicating that they can take on an extra payment without putting too much strain on their monthly budget.
Before you apply, you can use a personal loan calculator to determine the monthly payment a personal loan would create, calculate your DTI, and assess its impact on your budget.
CAN YOU GET A PERSONAL LOAN WITHOUT A CREDIT INVESTIGATION?
Why should I take out a personal loan?
Personal loans offer more flexibility than other types of loans that you take out for a specific purpose, such as buying a car or a house. In fact, borrowers may have a variety of reasons for considering one, such as:
- Debt Consolidation
- Big purchases
- Unexpected bills (medical or car bill)
- home improvement project
Personal loan interest rates can be lower than other types of financing. For example, the average credit card interest rate is 14.52%, according to the latest figures from the Federal Reserve, making a personal loan a more affordable way to finance a purchase.
Make the best choice for your unique situation by visiting a site like Credible to explore your personal loan options and to locate the best personal loan rates.
THE BIGGEST MISTAKE TO AVOID WHEN TAKING OUT A PERSONAL LOAN
Another reason a personal loan can be attractive is that most are unsecured and require no collateral, which can be useful in an uncertain economy. Although the interest rates for a home equity line of credit may be lower than for a personal loan, depending on your credit history, you are putting your home at risk if you cannot make a payment.
A personal loan is also an appropriate type of borrowing vehicle if you are trying to build or repair your credit score. As long as you make your payments on time and don’t negatively impact your DTI, you can improve your FICO score over the life of the loan, making future borrowing easier and more affordable.
The bottom line about personal loans is this: when used responsibly, they can help borrowers by providing needed funds at a low interest rate. The most crucial step is to make sure you can repay the loan. Use a personal loan calculator to determine the monthly personal loan payment, then consider how it will affect your budget.
