Since the beginning of 2022, interest rates on personal loans have been steadily rising in response to the Federal Reserve’s actions to combat inflation by increasing the federal funds rate.
However, even with anticipated Fed rate cuts later this year, it may not immediately lead to a decrease in personal loan rates.
Jean Hopkins, director of consumer lending at WeStreet Credit Union in Tulsa, Oklahoma, explains that changes in the federal funds rate primarily impact variable-rate credit products like credit cards or home equity lines of credit. Personal loan rates, on the other hand, are influenced by broader economic factors such as inflation and unemployment.
The interest rate you receive on a personal loan is heavily influenced by your creditworthiness and income level. To secure a low rate on a personal loan, consider the following tips:
1. Maintain a high credit score
Lenders heavily rely on credit scores to assess the likelihood of repayment. Individuals with high credit scores typically qualify for the lowest rates.
Spencer Betts, a certified financial planner at Bickling Financial Services in Massachusetts, highlights the importance of checking your credit report for any past-due accounts or suspicious activities before applying for a personal loan.
To maintain or improve your credit score, focus on making timely payments on all credit accounts and keeping your credit utilization low.
Jean Hopkins recommends not utilizing more than 30% to 40% of your available credit on credit cards to demonstrate responsible credit management.
2. Keep a low debt-to-income ratio
Another crucial factor lenders consider is your debt-to-income ratio, which reflects the percentage of your monthly income allocated to debt payments.
Maintaining a low debt-to-income ratio increases your chances of securing a lower interest rate on a personal loan.
Jen Hemphill, an accredited financial counselor in Kansas, recommends keeping your debt-to-income ratio around 30% or less to demonstrate financial stability to lenders.
Paying off existing debts before applying for a personal loan can potentially improve your debt-to-income ratio and increase your chances of qualifying for a favorable rate.
Consider paying off smaller debts first to reduce your monthly obligations and lower your debt-to-income ratio.
Additionally, including all sources of income, such as alimony or child support, on your loan application can help improve your debt-to-income ratio.
3. Compare offers to find the best deal
Before applying for a personal loan, it’s essential to compare offers from multiple lenders to secure the most favorable terms.
By pre-qualifying online, you can assess potential APRs, monthly payments, loan amounts, and repayment terms without impacting your credit scores.
Pay attention to repayment terms and total interest costs over the loan term when comparing offers, as longer terms may lower monthly payments but increase the overall cost.
Utilize a personal loan calculator to understand how different variables like loan amount and interest rate impact payments and total interest.
When deciding between competitive loan offers, evaluate perks and features offered by lenders to align with your financial goals.