Interest rates are on the rise as the Federal Reserve tries to wrangle record-high inflation. The central bank does this so that lending becomes more expensive and it can try to slow down the economy, hopefully without sending it into a recession.
However, rising interest rates mean that loans are now becoming more expensive and not as desirable, compared to the record-high demand since the onset of the pandemic.
But can you still get a reasonable interest rate on a personal loan?
CNBC Select investigates how you can get the best rate possible on any loans in the new future, and how to improve rates on your current outstanding loans.
How to get a low interest rate on a personal loan
The average rate for a 24-month personal loan is 8.73%, according to the most recent Federal Reserve data. However, this average rate has been sliding since 2018, when it was 10.32%. It's also important to remember that these are just average rates. There are personal loans currently available with APRs under 4%.
Here are the three main components to getting the best interest rate possible.
1. A good credit score
Getting the best rate on a personal loan is no secret — the higher your credit score, the more likely you are to get a better interest rate. You typically must have a very good or excellent credit score (740 and above) to qualify for the lowest rates. Plus, a higher score may land you other benefits like a longer repayment period and a bigger loan.
However, don't let a less-than-perfect credit score be a deterrent from applying. Even if you don't have a stellar credit score, there still are ways to get a personal loan with a favorable interest rate. There are other factors taken into consideration with lenders to determine what you can qualify for, such as your work experience and education history. In fact, there are personal loans specifically for those with bad credit scores, including:
Upstart Personal Loans
Annual Percentage Rate (APR)
5.20% - 35.99%
Loan purpose
Debt consolidation, credit card refinancing, wedding, moving or medical
Loan amounts
$1,000 to $50,000
Terms
36 and 60 months
Credit needed
FICO or Vantage score of 600 (but will accept applicants whose credit history is so insufficient they don't have a credit score)
Origination fee
0% to 12% of the target amount
Early payoff penalty
None
Late fee
The greater of 5% of monthly past due amount or $15
Terms apply.
OneMain Financial Personal Loans
Annual Percentage Rate (APR)
18.00% to 35.99%
Loan purpose
Debt consolidation, major expenses, emergency costs
Loan amounts
$1,500 to $20,000
Terms
24, 36, 48, 60 Months
Credit needed
Poor/Fair
Origination fee
Flat fee starting at $25 to $onem00 or percentage ranging from 1% to 10% (depends on your state)
Early payoff penalty
None
Late fee
Up to $30 per late payment or up to 15% (depends on your state)
Click here to see if you prequalify for a personal loan offer. Terms apply.
If you're unsure what your credit score is, you may consider signing up for a credit monitoring service like Chase Credit Journey or CreditWise® from Capital One.
2. Your employment history
The second part is employment history. The lender will likely ask for a history of employment to demonstrate you have the means to pay back the debt. To prove this, you will likely have to get a letter from either your manager or HR department. Although more challenging, it is still possible to get approved for a personal loan if you're unemployed.
3. Verifiable income
Lastly, you will need some type of verifiable income. Similar to employment history, the lender will want to see your current income to ensure you can make the monthly payments of the loan. This is particularly useful if you're still working on improving your credit score. Again, it might be slightly more challenging, but you can still get approved for a personal loan if you're self-employed and have inconsistent income.
Compare offers to find the best interest rate
Like anything else, you need to shop around to get the best deal and loan terms. So if you're in the market for a personal loan to help pay off credit card debt, start a home renovation or simply need some breathing room — it's best to start shopping around based on your needs.
Even if you don't need the money for several months, it's advantageous to know what rates look like and what your monthly payment will be to repay the debt.
If a personal loan is in your future, consider our top picks of lenders:
LightStream Personal Loans
Annual Percentage Rate (APR)
7.99% - 25.49%* APR with AutoPay
Loan purpose
Debt consolidation, home improvement, auto financing, medical expenses, and others
Loan amounts
$5,000 to $100,000
Terms
24 to 144 months* dependent on loan purpose
Credit needed
Good
Origination fee
None
Early payoff penalty
None
Late fee
None
Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.
SoFi Personal Loans
Annual Percentage Rate (APR)
8.99% to 25.81% when you sign up for autopay
Loan purpose
Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses
Loan amounts
$5,000 to $100,000
Terms
24 to 84 months
Credit needed
Good to excellent
Origination fee
No fees required
Early payoff penalty
None
Late fee
None
Terms apply.
Happy Money
Annual Percentage Rate (APR)
11.25% - 24.50%
Loan purpose
Debt consolidation/refinancing
Loan amounts
$5,000 to $40,000
Terms
2 to 5 years
Credit needed
Fair/average, good
Origination fee
0% to 5% (based on credit score and application)
Early payoff penalty
None
Late fee
5% of monthly payment amount or $15, whichever is greater (with 15-day grace period)
Terms apply.
CNBC Select also has a comparison tool and loan marketplace that allows you to easily review different loan offers.
This tool is provided and powered by Engine by MoneyLion, a search and comparison engine that matches you with third-party lenders. Any information you provide is given directly to Engine by MoneyLion and it may use this information in accordance with its own privacy policies and terms of service. By submitting your information, you agree to receive emails from Engine by MoneyLion. Select does not control and is not responsible for third party policies or practices, nor does Select have access to any data you provide. Select may receive an affiliate commission from partner offers in the Engine by MoneyLion tool. The commission does not influence the selection in order of offers.
Bottom line
Personal loans are a solid option for consumers to help pay off lingering debt or even help get by during an unexpected job loss.
However, before you apply, be sure to know the terms of the loan well, including the interest rate, if it's fixed or variable APR and how long you have to pay the loan off in full.
Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date
