Low Interest Personal Loans in 2021

Personal loans are generally short-term loans provided by banks, peer-to-peer lending platforms and credit unions. Depending on who the money is borrowed from, the proceeds can be used for consolidating credit card debt, making a major purchase or even taking a vacation. Low-interest loans typically have an interest rate below 12 percent.

Loan terms vary by lender, but there’s always a predetermined payment period, often ranging from three to five years. These are installment loans, and the money is repaid via monthly payments. Before applying for a loan, it’s a good idea to calculate your debt-to-income ratio, or DTI ratio, which is your total monthly debt payments divided by your total gross monthly income. Lenders view applicants who have low DTI ratios as more reliable borrowers.

How do lenders determine interest rates?

Every lender uses its own algorithm to determine the interest rate you’ll receive. Three of the most important factors lenders evaluate are credit score, debt-to-income ratio and annual income. The lower your DTI and the higher your income and credit score, the more likely you are to qualify for low rates and large loan amounts.

Outside of these factors, some lenders also take into account things like your area of study, job history and education. This is why it’s so important to shop around and compare rates with multiple lenders.

What is considered a low interest rate?

Those with the highest credit scores, 720 to 850, may be offered rates between 10.3 percent and 12.5 percent.

Why it’s important to compare low-interest loans ?

Comparing loan rates and lenders can be a daunting task, but it’s necessary if you want to find the lowest interest rate possible. Because lenders use their own algorithms to determine interest rates, the same financial profile could get you a much lower rate at one lender than another. Here are some other factors to be aware of when comparing loan rates and lenders:

  • Loan term: The number of years that you will repay the loan. Most commonly, personal loan terms are three to five years.
  • Interest rate: Interest rates vary by lender and are determined primarily by your credit score, income and overall financial health.
  • Origination fee: The origination fee is an up-front fee charged by a lender to process a new application. These fees can range from 1 percent to 8 percent, depending on the loan amount, your credit score and the length of the loan.
  • Other fees: Some fees may be included in the APR calculation, but you should also be aware of things like late fees and prepayment penalties.

How to qualify for low-interest personal loans ?

There’s a variety of ways to improve your chances of scoring the best low-interest loan.

    1. Research all of your options. Shop around and check rate offers from multiple lenders to ensure that you are getting the best deal for your personal situation.
    2. Look for ways to get discounts. Many lenders offer rate discounts when you enroll in their autopay programs. Some lenders also offer discounts if you’re an existing customer or hold checking or savings accounts with them.
    3. Consider credit unions. Because they are nonprofit organizations, credit unions typically offer lower-cost loans than standard banks or lenders.
    4. Apply for preapproval: Preapproval, offered by some lenders, is a way to check whether or not you qualify for a personal loan before you formally apply. This is a valuable tool if you’re just shopping around, and it also saves you from a hard pull on your credit.
    5. Only apply for the amount you need: When calculating your desired loan amount, aim to apply for the lowest amount you think you’ll need to cover your expenses. Choosing a low loan amount will reduce your monthly payments and the total amount you’ll pay in interest over the life of the loan.
    6. Pay down debt: When determining your eligibility for a loan, most lenders look at your debt-to-income ratio, or DTI ratio — the amount of debt you hold relative to your income. By reducing the amount of debt you owe, you decrease your DTI ratio and make yourself eligible for more loans and lower APRs.
    7. Know your credit score: Many lenders have minimum credit score requirements in the mid-600s, but most give their best rates to borrowers with credit scores of at least 700. If you don’t need the cash immediately, work on improving your credit score before applying for a personal loan.

The bottom line

To find the lowest interest rates on personal loans, you’ll likely need a good credit score. However, even if your credit score is below average, there are still ways to find low-interest loans with unique features and few fees.