What You Need to Know About Average Personal Loan Interest Rate Trends

Personal loans continue to grow in popularity as a borrowing option. As of Q3 2023, TransUnion data shows that over 23.2 million borrowers held unsecured personal loans, with an average outstanding balance of $11,692. However, the cost of borrowing these funds has become a critical consideration for anyone considering this financial tool.

Current Borrowing Costs for Personal Loans

If you’re shopping for a personal loan, understanding current rates is essential. According to Credible.com’s lending marketplace data from late January, borrowers with a credit score of 720 or higher who pre-qualified for a three-year personal loan were quoted an average personal loan interest rate of 15.36%. For those considering shorter repayment windows, the Federal Reserve reports that two-year personal loans carry an average rate of 12.35%.

These elevated rates reflect the broader economic environment. Over the past year, the Federal Reserve implemented multiple rate increases to address inflation pressures, pushing up borrowing costs across the market.

Why Your Rate Matters: Understanding Borrowing Mechanics

Interest represents the price you pay to use borrowed money. When you take out a personal loan, your rate typically remains fixed throughout your repayment period, meaning your monthly payment stays consistent. To illustrate: a $10,000 personal loan at 11% interest over three years would result in monthly payments of approximately $327, with total interest charges reaching $1,786.

Because rates are locked in, you can accurately forecast your total borrowing costs upfront—a key advantage of personal loans over variable-rate debt products.

Key Factors That Determine Your Personal Loan Interest Rate

Several elements influence the rate a lender offers you:

Credit Profile Impact Your creditworthiness stands as the primary driver of your interest rate. Those with strong credit histories (typically 720+) secure more favorable rates, while applicants with limited or damaged credit face higher borrowing costs—or potential rejection entirely.

Loan Structure Choices Most personal loans are unsecured, requiring no collateral. However, a secured loan—where you pledge an asset as backup—can potentially unlock better rates, particularly if your credit isn’t ideal. The trade-off: you risk losing that asset if you default.

Debt Burden and Income Verification Lenders evaluate your debt-to-income (DTI) ratio, preferring applicants below the 36% threshold. Your income level also matters—stable, sufficient earnings signal lower risk to lenders. Additionally, adding a creditworthy co-signer or co-borrower can strengthen your application.

Loan Parameters The amount you borrow and your chosen repayment term both affect pricing. Interestingly, longer terms sometimes carry lower rates despite higher total interest costs, while shorter terms may demand premium rates.

Strategic Approaches to Securing Competitive Rates

Compare Multiple Lenders Rates and terms vary significantly across banks, credit unions, and online platforms. Most lenders offer pre-qualification tools that let you check your rate without a hard credit inquiry, preserving your credit score while you shop.

Strengthen Your Financial Position Before applying, consider improving your creditworthiness. Pay down existing debts, ensure timely bill payments, and correct any errors on your credit report. Even modest credit improvements can lower your quoted rate substantially.

Optimize Your Debt-to-Income Ratio Reducing your DTI makes you a more attractive borrower. Strategies include accelerating debt payoff, seeking income growth, or restructuring existing loan terms through refinancing.

Evaluate Secured or Co-Signed Options If credit constraints are pushing your rates higher, secured loans or co-signed arrangements merit consideration—though weigh the risks and benefits carefully before proceeding.

Test Multiple Repayment Timelines Request quotes across various term lengths (typically one to seven years). A slightly longer term might offer a lower rate and more manageable monthly payment, even if total interest increases.

The personal loan market remains competitive despite elevated average personal loan interest rate levels. By understanding these rate-driving factors and implementing strategic borrowing practices, you can work toward securing terms that align with your financial situation.