If you’re applying for a personal loan, securing a low interest rate is critical — especially if you’re borrowing a large amount of money.
While shopping around for lenders can certainly help (rates vary greatly from one to the next), there are other things you can do to improve your chances of getting a low interest rate personal loan, too. This includes improving your credit score, lowering the balances on your debts, and more.
Here’s a quick look at what lenders consider when evaluating your loan application — and how you can boost your shot at those low rates.
Factor 1: Your credit score
Your credit score will be one of the top considerations when applying for a personal loan. And the higher the score, the better. To see what kind of rates you qualify for with your credit history, enter your desired loan amount into Credible's online marketplace and compare offers from lenders almost instantly.
“Generally, a good credit score is the biggest factor when trying to get approved for a low interest rate on personal loans,” said research analyst Simon Zhen. “With FICO credit scores, the most commonly used scoring model by U.S. lenders, a score of 700 or higher is likely to help borrowers secure the lowest personal loan rates.”
You can check your credit score through any of the three major credit bureaus — Experian, TransUnion and Equifax — though there may be a fee for it. Be sure to check with your bank or credit union before going this route, as many offer complimentary credit score monitoring for their customers.
You can also use Credible’s personal loan calculator to estimate your monthly payments so you can determine how the payment will impact your budget.
Factor 2: Your debt-to-income ratio
Your debt-to-income ratio — or how much you owe on loans, credit cards and other debts compared to your income each month — will also be a key determinant in your personal loan rate. If you're confident you have a good debt-to-income ratio, then use Credible's free personal loan tool to see what kind of rates you qualify for right now.
Here’s how Howard Dvorkin, chairman at Debt.com explains it: “Your debt-to-income ratio will also determine if a lender is willing to loan you money. A low debt-to-income ratio means you can responsibly take on more debt, and it increases your chances of getting approved for a loan, but a high debt-to-income ratio will do just the opposite.”
To calculate your DTI, just take your total monthly debts, divide it by your monthly income and multiply by 100. For example, if you make $5,000 per month and pay $2,500 toward your credit card bills and mortgage payment on a monthly basis, your DTI is 50 percent ($2,500 / $5,000 x 100).
Factor 3: Your loan term
The length of the loan you’re taking out influences your rate as well. In most cases, shorter-term loans will come with lower interest rates than loans with longer lengths.
According to Toby Smith, senior vice president of lending at SECU Credit Union, longer-term loans are simply riskier for lenders.
“If consumers can afford to repay their loan over a shorter period of time, they should elect to do so,” Smith said. “For example, a three-year auto loan repayment term will generally carry a lower interest rate than a six-year term. The reason for this is that the longer a debt is stretched out for repayment, the lender’s risk exposure is longer. More risk for the lender usually means a higher interest rate will be charged.”
Factor 4: Your employment
Your job — more specifically, the stability of that job — can influence your loan’s rate, too. Lenders want to see that a borrower has steady, consistent income and will be able to make their loan payments for the long haul. If your job history is spotty or you’re currently unemployed, it can be much harder to qualify for low interest rates (or even qualify for a loan altogether).
When you apply for a loan, you’ll likely need to provide proof of your employment. This is usually done with a recent paystub or via a form filled out by your employer.
Factor 5: Your relationship with the lender
Sometimes, your history with your chosen lender will actually play a role in your ability to get a low-interest personal loan as well. According to Zhen, “Many banks will provide rate discounts on personal loans when the borrower also has a banking relationship, such as a linked checking account from the same bank.”
For this reason, it’s important to include your own bank or credit union when shopping around for your personal loan.
Comparison shopping is always important when taking out a loan. Rates and terms can vary widely from one lender to the next, even for people with the best credit scores and DTIs.
“I know of people with similar credit histories and similar loan sizes who ended up paying vastly different interest rates on their loans just because one shopped their loan around while the other did not,” said Taylor Kovar, CEO at Kovar Capital.
Make sure to get loan estimates from at least three different financial institutions and compare the quotes side by side to ensure you’re getting the best deal (pay careful attention to the rate, any fees, and the APR). You can secure these quotes directly from the banks or credit unions you’re considering, or tools like Credible can help you shop several lenders with just a single form.