The average personal loan rate is 11.54% as of December 6, according to a Bankrate survey. Personal loan interest rates are trending higher over the past several months, increasing by about half-a-point since early July:
Personal loan rates vary widely based on creditworthiness. Borrowers with very good or excellent credit scores will see much lower interest rates than those with fair or poor credit. Often, borrowers with bad credit will apply for a secured personal loan that uses an asset as collateral in order to achieve lower rates:
When you obtain a personal loan – whether from a bank, credit union or online lender – you usually get the money upfront and pay in monthly installments for as long as seven years. Personal loans can total as much as $100,000, but the amount allowed depends on your debt-to-income ratio and overall creditworthiness.
Personal loans can be used for a variety of reasons, ranging from home repairs to debt consolidation. A college student might use it to cover an emergency expense, like a car repair. A personal loan might be ideal because approval happens quickly and you’ll receive the money within a day or two.
Since the loan payments will need to start right away and the payment period is likely to last a few years, “be diligent about paying that off as scheduled,” says Justin Nichols, co-founder and managing principal for advisor services of Garrett Investment Advisors in Manhattan, Kansas. “Ideally, if you have to get a personal loan, next semester try to position your schedule so you can get a part-time job and aggressively pay off the personal loan ahead of schedule.”
Personal loans are not usually used to pay for direct college expenses like tuition because many lenders will not allow them to go toward postsecondary education. Most students also realize that student loans – whether federal or private – are likely to have more advantageous terms than a personal loan.
There are two primary types of personal loans – secured and unsecured. To get approved for a personal loan, you’ll need to rely on your creditworthiness to get an unsecured loan, or collateral – such as a vehicle or securities – to obtain a secured loan. Secured loans usually have a lower interest rate because the collateral decreases the risk for the lender in case you can’t pay off the loan. Personal loans typically have fixed interest rates for the life of the loan.
Unsecured Personal Loans
As a full-time student, it might be difficult to get approved for an unsecured personal loan on your own because you likely don’t have enough income or a strong credit score. Fortunately, there are loans designed for people with bad credit.
If you apply for a loan, a lender will want to know how you will pay it back. “Where is this magical money going to come from if you don’t have a job and you’re in school?” says Tiffany Aliche, founder of The Budgetnista and author of “Get Good With Money.”
When you apply for a personal loan, pay attention to the interest rate you’re offered. It could be in the single digits if you have a strong credit score, or be as high as 35%, which would likely be significantly higher than your credit card’s rate.
Additionally, if you don’t have the credit history needed to qualify for a personal loan, you can potentially enlist the help of a creditworthy co-signer, like a trusted relative or friend.
Secured Personal Loans
You might not have a lot of assets that would be valuable enough to serve as collateral on a personal loan, but a vehicle that’s fully paid off – especially if it’s fairly new – could be one.
“The bank naturally should be more comfortable because there is a tangible asset that is acting as security for that loan,””Nichols says.
But if you can’t pay back the loan, you could lose your car.
That’s why an unsecured loan is “a more desirable loan for a borrower because if you can’t pay, the assets you have aren’t at risk of being taken right away,” Aliche says.
The minimum credit score necessary to get a loan varies by lender – it can be anywhere between 550 and 720. You’ll also need proof of consistent income. Remember that the higher your credit score, the better the interest rate you’ll get. To improve your chances of getting approved on your own, you could look for ways to quickly improve your credit score.
You could also apply with a co-signer, such as a family member or friend, who could make your application more appealing to the lender. If the co-signer has a consistent income, low debt-to-income ratio and a strong credit record, it should dramatically increase your chances for approval.
You’ll need to let the prospective co-signer know that you’re “putting them in a position that if you don’t pay, they are equally as responsible,” Aliche says. Your co-signer’s credit report will also reflect this new debt and possibly affect the person’s ability to buy a home or car.
Just bringing up the idea of a loan co-signer with a friend or family member could start a conversation that leads to that person lending you the money directly, Nichols says.
Benefits
- Better interest rate than credit cards: There’s no guarantee your interest rate will be in the single digits or low double digits – which would likely be lower than your credit card rates – but if it is, you could save hundreds of dollars over the life of the loan. “The interest rate on a personal loan should be more reasonable than racking up any credit card debt,” Nichols says.
- Immediate solution to a crisis: If you need money right away to deal with an expense that could dramatically affect your daily life and safety – such as urgent auto repairs or a medical emergency – a personal loan can quickly provide the funds you need.
- Expected payoff with future earnings: If you expect to start a full-time position within several months that will provide you with adequate income, the personal loan might come at the right time for your financial situation.
- Head start to financial responsibility: If you get approved with a co-signer, it could improve your credit history and score and be a first step toward learning to pay for your expenses as you get the income to pay for them.
Drawbacks
- Immediate payments: Unlike student loans, which let you defer your payments until after you graduate, payments for personal loans start within a month of loan approval.
- Higher interest rates: If you’re used to the low interest rates on student loans – especially federal loans – the rates for personal loans will likely be a shock. If your creditworthiness is not strong, you could end up paying rates that are similar to ones for credit cards.
- Losing assets: If you obtain a secured personal loan and can’t pay back the loan, you could lose the item – such as a vehicle – you used to secure the loan.
- Building debt: Student loans are already a huge debt burden for many people. If you add a personal loan, it will make starting out on your own even harder. “You literally start your adult life in a hole,” Aliche says. “The closer you can start your adult life at the start line, the better.” Instead, try to find other ways to address your debt, such as grants or scholarships through your school. “Go to the financial aid office regularly and make yourself known,” Aliche says. You could also decide to take fewer classes and find a job that offers more hours to pay down your debts.
You’ll want to consider a number of factors when comparing the best lenders for personal loans for students.
- What loan amounts does the lender offer? Many lenders offer minimum and maximum loan amounts, so it’s worth noting before applying. After all, if a lender’s minimum amount is $5,000 and you only need $4,000, you don’t want to waste your time.
- What terms can you expect? Not only will you need to secure the best interest rate, but you’ll also want to make sure to get the loan repayment length you need. Make sure you can afford the loan by using these and other factors to calculate your monthly payment.
- What fees does the lender charge? Many lenders charge an origination fee that can vary from 1% to 10% of the loan amount. Because this can greatly affect the payout you actually receive, be sure to note this and any other fees the lender may charge.
- How is the lender’s customer service? Check online reviews, such as the Better Business Bureau, Trustpilot or the Consumer Financial Protection Bureau. If the lender is a financial institution, you might reach out to family and friends about their experience.
- Federal student loans: The best loan options for most students are federal student loans, which have fixed interest rates that are usually lower than private student loans. They also might be subsidized, which means the student does not pay interest while in school, and offer forbearance and deferment options.
- Private student loans: Although terms for these loans aren’t usually as advantageous as federal loans and you’ll likely need a co-signer, private student loans are a good second-choice option. The opportunity for payment deferment during school is an advantage over personal loans.
- Family loans: If you can reach an arrangement that works for both you and your relative, a family loan might save money in interest rates and provide a safety net if you run into trouble making payments.
U.S. News selects the Best Loan Companies by evaluating affordability, borrower eligibility criteria and customer service. Those with the highest overall scores are considered the best lenders.
To calculate each score, we use data about the lender and its loan offerings, giving greater weight to factors that matter most to borrowers. Personal loan companies are evaluated based on customer service ratings, interest rates, maximum loan term, minimum and maximum loan amounts, minimum FICO score, online features, and origination fees.
The weight each scoring factor receives is based on a nationwide survey on what borrowers look for in a lender.
To receive a rating, lenders must offer qualifying loans nationwide and have a good reputation within the industry. Read more about our methodology.
To recap, here are the picks: