The difference between APR and interest rate on a personal loan is that the APR includes fees while the interest rate does not. Both the interest rate and the APR measure the cost of borrowing over a year's time, and both are expressed as a percentage rate. While these terms are fundamentally different, they are often used interchangeably and can be equal in cases where the loan has no fees.
One situation where the APR on a personal loan would be higher than the interest rate is if the lender has an origination fee whose cost is spread out over the life of the loan. An origination fee is a charge for initially processing the loan. Many lenders make you pay the fee upfront or deduct it from the amount you receive, in which case the cost is not included in the APR. However, other lenders divide up the cost of the origination fee between your payments. In that situation, your APR is your interest rate plus the yearly cost of the origination fee.
Here’s an example from the lender FreedomPlus: A borrower’s interest rate could be 15.49%, but their APR might be 18.34% because of the origination fee. Certain lenders may charge other fees that get included in the APR as well, but it’s unusual to see anything other than an origination fee with personal loans.
A good interest rate on a personal loan is 2.49% to 9%. The average APR for a two-year personal loan from a bank is 9.46%, according to the Federal Reserve, and the best personal loans have APRs as low as 2.49% for the most creditworthy borrowers. The rates you get will depend heavily on your credit, income, debt and other financial factors.… read full answer
The best way to get a decent interest rate on a personal loan is to comparison shop and get pre-qualified. WalletHub’s free personal loan pre-qualification tool helps you see which lenders have a high chance of approving you, as well as what interest rates you are likely to get if approved. You can then compare your pre-qualified offers to see what a good interest rate on a personal loan is for you personally.
Good Interest Rate on a Personal Loan by Credit Level
For excellent credit: You may be able to get interest rates as low as 4% - 7%. That’s where the majority of lenders set their minimums.
For good/fair credit: You’re unlikely to get the lowest interest rates available, nor should you have to pay lenders’ maximums. Look at lenders’ credit score requirements; the higher your score is above their minimum, the better your chances of getting a lower rate.
For bad credit: You probably won’t find rates lower than 25% to 36% from a bank or online lender. But personal loans from federal credit unions are capped at 18%.
If you’re planning on consolidating debt, a good interest rate on a personal loan is one that’s significantly lower than the rates on your existing debt. But as you compare personal loan interest rates, don’t neglect other terms.
A low interest rate might not be as great as it seems if you also have to pay costly fees to go along with it. For example, many lenders charge “origination fees” of 1% to 6% of the loan amount as an extra cost for opening the loan.
The best way to lower the interest rate on a personal loan is by refinancing the loan with another lender. When you refinance, you use a new loan or line of credit with a lower interest rate to pay off the old loan, so you owe the old balance to the new lender. And since interest won’t be accumulating as quickly, you should be able to pay off the new loan sooner, assuming your monthly payment stays the same or increases.… read full answer
But some borrowers may also find success simply asking for a lower rate. Asking for a rate reduction is the easiest route, as it doesn’t require applying for a new financial product. It’s just less reliable. Still, it’s a good idea to pursue both paths at once – pre-qualify for some refinancing options and then mention their rates when negotiating. If the original lender won’t offer a cheaper rate, then refinance.
How to Get a Lower Interest Rate on a Personal Loan:
Ask for a lower rate. If you call your lender and express concern that your APR is too high, there’s a chance the lender will reduce the rate. That’s especially true if you make it clear that you are experiencing temporary financial distress, that your creditworthiness has improved significantly since you applied, or that you are willing to take your business elsewhere. In any case, it doesn’t hurt to ask.
Take out another personal loan. If you get a lower interest rate on a new personal loan, you can use it to pay off the old one and save money in the long run.
Move the debt to a balance transfer credit card.Balance transfer cards offer 0% introductory APRs for a certain number of months, and are best if you’ll be able to pay off the remaining balance completely in that time period. You’ll need good or excellent credit to qualify.
Tips for Negotiating a Lower Interest Rate on a Personal Loan
You can pre-qualify for a personal loan or for a balance transfer credit card (but not for home equity products). So if you pre-qualify for a loan with lower rates or a 0% balance transfer card, you can use that to your advantage when negotiating with your lender. If they know you’re thinking of moving your balance elsewhere, they may work with you. If not, you’ve got a good deal to fall back on.
It also helps to have another good reason for why the lender should lower your rate. One example is if your credit score has gone up a lot since you first opened the loan, meaning you’re a less risky borrower now. Another is if you’re having financial hardship (e.g. unemployment, sickness or damage to your home from a natural disaster) and simply can’t afford your payments. Lenders may be sympathetic to these problems and offer you at least a temporarily lower interest rate.
The keys to negotiating with your lender are to be clear about what you want to accomplish, truthful about your situation, and polite to the representative. Ask for copy of any new terms you agree to in writing. And if you’re unable to get a good deal, refinance instead.
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