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Loans

A recent TransUnion report shows personal loan balances are up 31% — here's how to get a lower interest rate

Personal loans provide funding in a pinch, but interest can make taking on debt even more expensive.

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According to the Q2 2022 TransUnion Credit Industry Insights Report, total personal loan balances have increased by 31% since last year, reaching a record total of $192 billion.

That number may not sound so surprising, however, when you consider that we've been experiencing significant inflation, which has resulted in higher prices for food, gas, furniture and pretty much everything else. Not to mention, personal loans have become a more popular financing tool recently because of their versatility, as they can be used to cover any number of expenses, from a wedding or vacation to home renovations or car repairs.

Personal loan amounts can range from as little as $600 to as much as $100,000 — it really depends on the lender — and as with any form of debt, that funding comes at a cost. Not only will you need to repay the amount you borrow in smaller, equal monthly payments, you'll also be charged interest.

The rates for a personal loan tend to be lower than the rates for a credit card — according to the Federal Reserve System's most recent data, current personal loan annual percentage rates, or APRs, average 8.73%, while current credit card APRs average 16.65%.

If you do find yourself with a large expense, check to see if you have enough savings to cover the cost first — if it's something unexpected, that's when your emergency fund would come in handy.

If taking on a personal loan really is the best way to pay for it, there are a few things you can do to ensure you're getting the lowest possible interest rate from your lender, which can potentially save you hundreds or even thousands of dollars while you pay back the balance.

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Improve your credit score before you apply for a loan

The best way to get a lower interest rate on your personal loan (or any other line of credit) is to improve your credit score before you apply. With a higher credit score, you'll be more likely to receive a lower interest rate because the lender will see you as a less risky borrower — someone who is more likely to repay the loan balance in full without missing any payments.

It's in your best interest to work on improving your credit score before submitting your application, especially if you don't need the money right away. Paying your bills on time is the most important thing you can do to help raise it since your payment history actually accounts for 35% of your credit score. You should also try to keep your debt balance low and check your credit report regularly so you can dispute any potential inaccuracies that might be bringing your score down.

Credit monitoring services such as Experian can also help you keep an eye on your credit profile. Its free *Experian Boost™ feature lets you connect your bank account and raise your FICO® Score whenever it finds recurring payments for certain utility, telecom and streaming services. In other words, paying your cell phone bill or for a streaming subscription each month can increase your credit score.

Experian Boost™

On Experian's secure site
  • Cost

    Free

  • Average credit score increase

    13 points, though results vary

  • Credit report affected

    Experian®

  • Credit scoring model used

    FICO® Score

Results will vary. See website for details.

How to sign up for Experian Boost:

  1. Connect the bank account(s) you use to pay your bills
  2. Choose and verify the positive payment data you want added to your Experian credit file
  3. Receive an updated FICO® Score

Learn more about eligible payments and how Experian Boost works.

While it can take Experian Boost™ just a few minutes to analyze your bank accounts and bump up your FICO® Score, building healthy credit habits is really the most sustainable way to maintain it.

In addition to paying all your bills on time each month, make sure you're also keeping your credit utilization — the amount of credit you're using compared to the total amount of credit that's available — is low. For example, if your total amount of credit is $10,000 and you've only used $5,000 of it, your utilization is 50%. It's generally recommended that you keep your credit utilization below 30%.

It's also important to not apply for too many new lines of credit at once. Every time you open a new line of credit, a lender runs a hard inquiry on your credit report, which can temporarily lower your score — be thoughtful about which lines of credit you're opening up and when you apply for them.

Sign up for autopay so you never fall behind

Some personal loan lenders offer discounts for using autopay, a feature that allows payments to be automatically deducted from your linked bank account, ensuring you never fall behind since you won't have to remember to manually pay your bill each month.

SoFi and LightStream are just a few lenders that offer 0.25% to 0.50% APR discounts for using the autopay feature. Even if 0.25% doesn't sound like a lot at first, a little can go a long way and the money you'll be saving over months and years of paying interest certainly adds up.

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.

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.

Snagging an autopay discount can help you save a little money, especially if you need funding in a pinch and don't have several months to work on improving your credit score. Applying for a personal loan with a good credit score should also put you in a solid position to receive a lower interest rate.

Find a personal loan that's right for you

Check out Select's personal loan marketplace tool which will help you find a loan that best fits your financial situation. It allows you to compare a variety of lenders to ensure you're getting the best deal.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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