Key takeaways:
- The five ways to obtain a lower interest rate on a personal loan can include choosing a shorter repayment term, improving your debt-to-income ratio, exploring collateral options, shopping around for loans, and working on improving your credit.
- Through these strategies, you can potentially save money on interest over the loan’s terms.
- A borrower can take control of some factors that impact interest rates, and secure the best possible rate for their personal loan.
Most lenders have a range of interest rates they offer to borrowers. As of this writing, Upstart’s marketplace offers fixed interest rates on personal loans originated on its platform.
Obviously, a lower interest rate is preferable to a higher one, and even a seemingly small difference can save you significant money over the term of a personal loan. For example, on a $20,000 personal loan with a 5-year term, a 15% APR can save you more than $3,200 in interest compared to the same loan with a 20% APR.
5 ways to get a lower interest personal loan
There are some components of personal loan interest rates that are obviously out of your control, such as market conditions. The Federal Reserve has raised benchmark interest rates aggressively since inflation started to rise, and this has pushed most consumer interest rates higher as well, including those on personal loans. So, even borrowers with top-tier qualification can get interest rates as low as those available just a couple of years ago.
Having said that, there are several strategies you can use to make sure you get the lowest interest rate possible on a personal loan, and here are 5 of the most effective.
1. Use a shorter loan term
You might be familiar with the concept that a 15-year mortgage will generally have a lower interest rate than a 30-year loan, all other factors being equal. What you might not realize is this applies to personal loans as well. As a general rule, the shorter the repayment term, the lower the interest rate.
For example, if you can afford to repay your personal loan in three years instead of five, choosing the three-year repayment option could potentially get you a lower interest rate. When you view your loan offers, be sure to compare different term lengths.
2. Improve your DTI ratio
In addition to your credit history and loan term length, one of the biggest factors lenders use when determining your interest rate is your other debts. One metric that is commonly used is known as the debt-to-income, or DTI ratio. You can calculate yours by adding up your monthly debt payments (mortgage, auto loan, credit cards, etc.) and dividing the total by your pre-tax monthly income. For example, if your monthly payments are $2,000 and you earn $5,000 per month, your DTI ratio is 40%.
There’s no specific cutoff regarding what DTI ratio is considered “too high” but mortgage lenders typically consider 45% as the highest they’ll accept when making a loan. But if yours is a bit on the high side, it might be a smart idea to work on reducing it—maybe try to pay off your lowest-balance credit cards over the next few months.
3. Explore your collateral options
Most personal lenders and lending marketplaces (including Upstart) originate unsecured personal loans¹, but there are some that allow you to pledge collateral. In exchange for this, you may be able to get a better interest rate. Just be aware that if you pledge a certain asset—such as your car—and you can’t make your personal loan payments, the lender will be legally able to repossess it.
4. Shop around for a loan
Most major personal loan lenders and lending platforms allow you to check your personalized rate offers with no impact to your credit score, and all it takes is filling out a quick and easy form. So, you have no reason not to check your rate offers at several different personal loan companies to find the best deal. You might be surprised at how different loan offers can be for the exact same borrower, especially if your credit history isn’t ideal.
5. Work on your credit
This one is clearly not a quick fix, but your credit history is usually the largest factor that determines your personal loan interest rate. Great credit takes years to build, but you might be surprised at how much of an impact you can have in a short time period. Just a couple of tips to boost your score relatively quickly:
- Pay down some of your credit card debt. This reduces the percentage of your available credit you’re using, which is one of the biggest factors in the credit scoring formulas. As an alternative, you could also ask your creditors for higher limits, which would have the same basic effect.
- Don’t apply for any new credit. New credit accounts and inquiries (credit applications) have a negative effect on your credit score, but only inquiries within the past 12 months count in the FICO score formula. By allowing old inquiries to fall off and recently opened accounts to age, it can positively impact your score.
The bottom line on low interest personal loans
In several ways, the interest rates you can get on personal loans are out of your control, and other factors (such as excellent credit) can take a long time. However, there are several strategies you can use that might get you a significantly lower interest rate on your next personal loan.
¹ While most loans through Upstart are unsecured, certain lenders may place a lien on other accounts you hold with the same institution. It is important to review your promissory note for these details before accepting your loan.
Won't affect your credit score¹