Heather Halpern

What is a Good Interest Rate on a Personal Loan? Now is the time to buy. Or so says society. Currently, we are being marketed nonstop, urging us to buy, buy, buy. Buy houses, buy cars, buy vacations, buy new and exciting big-ticket purchases. The message is clear, buy until you can’t buy anywhere. With all of this new buying taking place, credit cards and loans are being utilized more and more. It is extremely important to know and understand the terms of your loan agreement before dotting your Is and crossing your Ts. To do that, you must know what a good interest rate is for a personal loan. Below, we will outline what exactly a personal loan is and what a good interest rate is for that personal loan. Because every buyer should know what the true cost of their next purchase is. What is a Personal Loan: A personal loan is defined as, “an amount of money you can borrow to use for a variety of purposes”. Typically personal loans are borrowed from a lending institute such as a credit union or bank. You may need a mortgage to finance a home or an auto loan to finance a car. However, a personal loan can be used to purchase a variety of big-ticket items. These items can include College or trade school Medical expenses Wedding and hone New furniture or appliances Consolidating debt Most personal loans are considered unsecured loans. Unsecured loans require no collateral which is why their interest rate is usually higher and has associated fees. We will discuss interest rates in more detail later on. Unsecured personal loans are usually approved based on a consumer's current credit score and past debts. A lender will approve a personal loan based on the consumer’s financial resources. The 5 C’s of Credit will all be considered. The 5 C’s of credit are briefly outlined below. Character: This includes credit score and management of past accounts Capacity: This includes your history of employment, income, current job stability, and current debt. Collateral: This is typically not used in personal loans. Capital: This includes a consumer's investments, savings accounts, land owned, and jewelry. Conditions: This included the specifics of the transaction IE: How the money will be used if approved. Repaying a Personal Loan Personal loans repayment differs from credit card repayments. Personal loan repayments require the borrower to pay a fixed amount over a specific period until the loan is completely paid off. Credit card payments differ month to month. Interest Rates: Like credit cards, personal loans do have an interest rate attached to them. Interest rates are how the lender makes a profit. Remember, no one works for free nowadays and even the banks and credit unions need to get their fair share. An interest rate on any personal loan directly affects how much a borrower will be charged to borrow the loaned money over the lifetime of the loan. Personal loans can have fixed or variable interest rates. With the latter, A fixed interest rate is fixed for the duration of your loan while a variable interest rate may change over time. Good Interest Rate Now that you have a good understanding of what interest rates are, let’s discuss what a good interest rate is. According to Experian, in Q2 of 2019, personal loans had an average interest rate of 9.41%. Personal loans like other types of loans and credit can have an extremely wide range of interest rate offerings. Different lenders may have ranged between 6% to 36% on their loans. It is important to discuss the interest rate with your lender and be comfortable with the rate before signing the personal loan agreement. An interest rate is usually classified as good if it is below the national average. Just because you want a good interest rate doesn’t mean you are guaranteed to have it. Your interest rate is determined by a combination of your credit score, debt-to-income ratio, and other factors. APR’s Annual percentage rates, better known as APRs, include a personal loan’s interest rate. This represents the loan's interest rate and any other fees and expenses associated with the loan. For example, if Bob is seeking an $8,000 personal loan with a 3-year repayment plan and an interest rate of 9%. Over the lifetime of the loan, Bob would pay a total of $1,158.32 in interest. If there's an additional 5% origination fee, Bob’s price just increased by another $450. The APR on Bob’s loan would be 12.78%. This would include the interest rate, origination fee, and any other fees associated with the personal loan. Make sure you consider the APR along with the interest rate, as it provides a more accurate price of what the personal loan will cost you. We live in a world where bigger is better. We want the newest gadgets as soon as they come out. Sometimes, in order to afford those new purchases we need to take out personal loans. Make sure you understand what a good interest rate is before committing to a personal loan.