Personal Loan APRs
An APR is the amount of interest a person will pay on their total loan amount annually. Lower APRs translate to more affordable monthly payments.
In most cases, it will make more sense to choose a loan with a lower annual percentage rate, however, at times, a loan offer with a lower rate can require the borrower to pay other fees. If you’d prefer to use that money towards home improvements, you might choose a type of loan that offers a slightly higher APR that doesn’t feature these types of requirements.
While APRs make it easier to compare loan offers, you’ll want to consider all of the factors involved. An APR is shown as a percentage and includes costs and fees related to a loan. These costs and fees will vary. Here are some examples of fees that are commonly included in the APR:
- Document fees, which often pertains to drawing up documents for a loan.
- Underwriting fees-an underwriter is the person who reviews a loan and has the final say.
- Processing fees are what banks use to lump all kFs of costs into a single category, so make sure you ask what the processing fees entail.
Often, for most loans, the associated fees often pertain to managing and processing the loan.
Average APR Rates for Personal Loans
On average, personal loan interest rates vary between ten to twenty-eight percent. These interest rates will vary based on the borrower’s qualifications, the lender, the loan amount, and the length of the loan.
When it comes to determining the annual percentage rate, or APR, your credit score will be one of the largest factors. Generally, the higher your score, the lower the APR and interest rate. People with excellent credit, which is considered a credit score between seven hundred and eight hundred, can expect rates that are around ten to twelve percent. These individuals may also qualify for an even lower APR.
How Annual Percentage Rates Work
If you have average or poor credit, the APR on personal loans can range from eighteen percent to thirty-six percent. In fact, in many states, a thirty-six percent APR is the limit allowed on personal loans, however, exceptions do apply. If you don’t have a credit history, you can have trouble qualifying for a personal loan. But this doesn’t mean you should choose a payday loan instead. A payday loan can easily trap a consumer in a cycle of debt that’s never ending. You should first consider going to a non-profit financial assistance organization or a credit union instead.
Interest Rates on Personal Loans
Interest rates for personal loans can vary between two to thirty-six percent, depending on the lender. Credit unions and banks will offer competitive rates, however, some of the lowest rates available can be found from online lenders who focus on creditworthy borrowers. If you have a poor credit score, you may have better luck with an online lender because some of these lenders will accept applicants wills scores well below six hundred. However, the rates will usually be higher because of this.
When it comes to whether or not to approve a loan, a lender will usually look at a wide variety of data points. Commonly, they’ll first take a look at your credit history and score, your income to debt ratio, and your employment status. When it comes to your credit history, a lender may consider the length of your credit history, the number of bankruptcies or charge-offs, the number of delinquencies in recent years, and the number of credit inquiries you may have had over a period of twelve months. Most lenders want to see a credit history of at least three years with no bankruptcies.
Pro Tip: Another factor lenders consider is your employment history and employment status. Some lenders will request proof of income. Others will also require a minimum household or personal income.
The debt to income ratio is another important measure that a lender will use to evaluate an applicant. A debt to income ratio is the amount of debt a person carries that’s relative to their pre-taxed monthly income. If your debt to income ratio is around forty percent, this will mean that your monthly debt payments will account for about forty percent of your pre-tax monthly pay. Generally, a lender will want to see an applicant with a debt to income ratio that’s under thirty-five percent. If you have a debt to income ratio of fifty percent of higher, this is usually a bad sign to lenders because it means you have trouble paying back debt.
The amount and length of a loan can also affect the interest rate. Usually, higher loan amounts and longer terms equal higher annual percentage rates.
How to Reduce a Personal Loan APR
Before you ask your lender to reduce your personal loan APR, check your credit report. The lender will be less likely to lower your APR if you have bad credit because it indicates a higher default risk. A high-risk borrower will usually be subjected to a higher interest loan. All consumers are eligible for a free credit report from all three credit bureaus, once a year.
If you borrowed your loan from a credit union or bank, you can set up an appointment to speak to a representative or personal banker in person. Ask the lender if they are willing to lower your APR. If you have good credit and a history of paying your bills on time, the lender will probably work with you.
Be honest and tell your lender why you need the APR lowered. Explain that you plan on honoring your debt and that reducing the APR could help you to do so. The lender may request that you write a letter of financial hardship, which can include facts such as illness or loss of employment.
If the lender simply refuses to lower the APR, consider paying off that loan with a new one. You can get quotes from other lenders that offer a better interest rate.