How to qualify for the lowest interest rates on a personal loan

Personal loans are a convenient way to borrow small or large amounts of money. They can be used to cover a variety of expenses — like a wedding, funeral, vacation, surprise medical bill, home repair and more. And the money is typically disbursed straight into your bank account in as little as one day, so you can start spending as soon as you need. Personal loans have also garnered a reputation for their lower interest rates compared to that of credit cards.

Personal loan APRs average 9.09%, according to the Fed's most recent data. By contrast though, the average credit card interest rate is around 16.44%. Some lenders, though, like LightStream offer rates as low as 6.99% APR* with AutoPay and offer additional Annual Percentage Yield discounts for enrolling in autopay to have your monthly payments automatically deducted from your bank account.

A lower interest rate can save you hundreds or even thousands of dollars when you're paying back a loan. This is why it's beneficial to receive an interest rate that's as low as possible.

Generally, the best way to secure some of the lowest interest rates on a personal loan is to make sure you're applying with an excellent credit score. The better your credit score, the more favorable your personal loan terms will be.

This is because lenders view applicants with higher credit scores as more creditworthy — a.k.a., more likely to make all on-time payments and pay back the loan amount in full. Thus, they're seen as less risky borrowers and lenders will be more inclined to collect lower interest charges from them.

This doesn't mean that you won't be approved for a personal loan if you don't have an excellent credit score (in fact, we've rounded up lenders that will still approve applicants with lower credit scores). You just might not get the best rates and terms.

If you have some time to plan ahead before taking on a personal loan and you aren't feeling too confident about your credit score, you might try taking steps to increase your credit score before submitting your application.

Continue paying down your credit card balances to lower your credit utilization rate. Credit utilization is the ratio between the amount of credit you're using and the total amount of credit available to you. Your credit utilization is the second-most important factor of your credit score (behind payment history).

The general rule of thumb is to keep your credit utilization rate below 30%, but a FICO study found that consumers with credit scores 750 and above use less than 10% of their total available credit limit. 

It can also be worth checking your credit report for any errors that may be dragging your credit score down. You can use Experian to sign up for a free account and check your credit report and receive credit scores from all three bureaus: Experian, Equifax and TransUnion. Experian also has a credit monitoring service (also free) that can help you detect possible instances of identity fraud, which can hurt your ability to get approved for new lines of credit.

Also, make sure that you don't apply for too many new lines of credit all at once. Too many new hard inquiries around the same time can also lower your credit score and make it even harder for you to get approved for your desired personal loan interest rate.

While it may feel like a lot of work, especially if you're totally new to personal loans, it can also be beneficial to shop around to different lenders to find the lowest rate you qualify for.

And if, despite these steps, your credit score still isn't quite where you feel it needs to be, you might consider getting a co-applicant for your personal loan application. A co-applicant is someone who applies for the loan with you and is equally responsible for paying back the full loan amount. Co-applicants are often also known as co-borrowers, and they can usually be added onto your personal loan application form.

Applying with a co-applicant who has a higher credit score than you can help you get approved for a lower interest rate and other more favorable loan terms. Just keep in mind that not all personal loan lenders accept co-applicants, so you'll want to double check with the lender before you submit your application. SoFi and OneMain Financial, for example, are two lenders that do allow co-applicants, and borrowers can apply for up to $100,000 and $30,000 respectively.

Lower interest rates make personal loans an attractive way to borrow money for large expenses. However, to make sure you're getting some of the lowest rates a lender offers, you'll need to apply with a really good credit score. Lowering your credit utilization and checking your credit report for mistakes are just a few steps you can take to raise your credit score just in time to submit an application. But if you're short on time or these actions ended up not being as effective as you thought, you might consider getting a co-applicant with a higher credit score.

Catch up on Select's in-depth coverage of personal finance, tech and tools, wellness and more, and follow us on Facebook, Instagram and Twitter to stay up to date.

*Your LightStream loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Excellent credit is required to qualify for lowest rates. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice. Payment example: Monthly payments for a $10,000 loan at 7.99% APR with a term of 3 years would result in 36 monthly payments of $313.32.