Did you know that there are $21.1 million in outstanding personal loans in the United States?
Whether it’s personal loans or a hike in your personal credit lines, getting additional personal funding can be a great tool for debt consolidation, facing an emergency, and other financial crises.
However, not all personal loans come with great rates. This is where you’ll want to consider how you can improve credit score to get the best personal loan interest rates possible.
Keep on reading for our full breakdown of how personal loans can elevate your personal finances’ health and grow your wealth.
Understanding Personal Loans: The Different Types
Before we dive into how your personal credit rates can affect your funding options, let’s explore the different kinds of personal loans you can get.
Personal loans come in various forms, and your specific requirements and creditworthiness determine the one that’s right for you.
Unsecured Personal Loans
Many personal loans are unsecured, which means you don’t have to put up any collateral that the lender may seize if you fail.
Unsecured loans may be less hazardous for borrowers since they don’t need collateral, but they may have higher fees, interest rates, and credit criteria than secured loans.
Secured Personal Loans
Personal loans with collateral are less frequent than those with no collateral. In most cases, the loan will be secured by funds held in a savings account, certificate of deposit, or money market account.
Credit unions and banks may have them. A credit-builder loan is a kind of secured personal loan designed to assist individuals in improving their credit.
Personal Loans From Lending Platforms
Like Plenti, for example, some markets or platforms link borrowers with lenders.
Borrowers may not notice a significant difference in the application and repayment process. Still, it may take a bit longer to get money after your application is accepted than with a conventional loan.
Personal Loans for Specific Purposes
Many lenders promote their personal loans for a particular purpose. For example, you may come across a lender with separate sites on its website for wedding, funeral, and emergency loans.
While the loan offers are aimed at individuals who wish to borrow money for that reason, the loans are often just personal loans. If you get one of these loans, you are not obligated to utilize all (or even all) of the funds for the specified purpose.
For instance, you’ll find that Plenti offers specialized loans for weddings and other ceremonies that might ask for a big chunk of funds.
Loans for Debt Consolidation
Consolidation loans are a popular kind of targeted personal loan—and a common reason individuals take out personal loans—to combine debts with higher interest rates.
The payoff, for instance, provides personal loans that may be used to pay off credit card debt. Borrowers may save money while also having a more organized repayment plan by consolidating their debt into a lower-rate personal loan with a set payback period.
Some lenders may transfer your loan to your credit card issuers or other lenders directly.
Personal Credit Scores 101
There’s no denying that most lenders use FICO credit ratings to evaluate loan eligibility. FICO ratings are divided into five categories, ranging from 300 to 850.
- Poor credit: 300 to 580
- Fair credit: 580 to 669
- Good credit: 670 to 739
- Very Good credit: 740 to 799
- Excellent credit: 800 to 850
Information from your credit reports is used to calculate FICO scores. Five main criteria determine your credit score.
First, there’s your payment history is a snapshot of how successfully you’ve paid creditors on time in the past. It is responsible for 35% of your credit score.
Then, we have the amount of debt relative to the total credit you have available to utilize your credit usage. Credit usage accounts for 30% of your credit score. Most lenders regard those who utilize a large proportion of available credit to be high-risk borrowers.
Third, we have the average age of your credit accounts (the age of your oldest and youngest credit accounts) accounts for 15% of your credit score. Long-term credit accounts may help you improve your credit score and impress lenders.
Fourth, we have the number of new accounts opened. Opening many new credit accounts in a short period of time seems hazardous to lenders. Your credit score is made up of 10% new credit accounts.
Lenders are also interested in the kind of credit accounts you have open. When asking for a loan, having a solid mix of credit accounts, such as installment loans, credit cards, home loans, and other accounts, may assist your case.
Your credit mix accounts for 10% of your overall credit score.
To evaluate whether you’re a good credit risk, lenders may look at additional variables such as your income and work history.
Why Is Such Importance Given to Credit Scores?
Lenders use credit scores to evaluate eligibility for loans and other goods since they provide a snapshot in time of your credit health. Your credit score influences the interest rate and loan duration choices available to you.
Credit ratings are used by lenders and other companies such as cellular carriers to assess eligibility. Insurance firms may use credit information in certain jurisdictions to determine insurance rates.
Before renting an apartment or condo to a new renter, landlords often check credit ratings. Your credit score may lead to more, and frequently better, opportunities.
What Are the Average Personal Loan Rates With Good Credit?
In general, the cost of a personal loan is determined by your credit score and history, the amount you borrow, the fees you pay, and the interest rate charged by the lender. A lender is more likely to offer you a reduced interest rate if you have excellent credit. You may also be charged lower costs than someone with bad credit.
For individuals with excellent credit, a lender may forgo origination costs. However, if a person does not complete their payments on time, they may be charged late fees.
Overarching Good Credit Personal Loan Rates
Various lenders have different interest rate ranges. The majority of personal loan interest rates range from 4.99% to 36%, with the lowest rates for borrowers with high to outstanding credit.
According to the latest current statistics from the Federal Reserve, the national personal loan interest rate reached 9.46%, specifically in the first quarter of 2021.
Consider how credit ratings and interest rates may influence the cost of a $5,000 personal loan with a five-year payback period.
A borrower with bad credit may be eligible for a 30 percent interest rate. They’ll have paid $9,706 — $4,706 in interest charges — after five years.
A borrower with acceptable credit may be eligible for a 20% interest rate. They will pay a total interest charge of $2,948, which is $1,758 less than the borrower with bad credit.
A borrower with excellent credit may be eligible for a loan with a 10% interest rate. They’ll spend $3,332 less in interest over the life of the loan than a borrower with bad credit — only $1,374 in total. The interest rate you get has a significant impact on the total cost of your personal loan.
Is Personal Loan Interest Tax Deductible?
You may deduct some of your expenditures from your gross income to lower your tax liability. You’ll be paying interest on your personal loan in this scenario, and you may be asking whether the interest you pay is tax-deductible, comparable to the interest you pay on your house mortgage.
Interest paid on a personal loan is usually not tax-deductible. However, the loan’s purpose may determine it. The interest you spend on it may be tax-deductible if you use it to fund business or educational costs (such as paying tuition). However, if you’re taking out a loan to pay for a wedding or a home improvement, the interest isn’t usually tax-deductible.
However, before writing anything off, talk to your accountant about what is and isn’t tax-deductible.
How Much of a Personal Loan Can You Get?
That depends on the lender’s willingness to offer you money depending on your credit history. Lenders are likely to accept you for a loan of up to $100,000, but this is contingent on your income and credit score.
If you’re unsure how much a lender will accept, it’s never a bad idea to inquire before submitting your application. Also, always make sure that you’re taking your time with your research. Shopping around for the best rates is always beneficial.
Getting the Best Loan Rate: Unlocked
Whenever people think about increasing their debts, it’s always comes attached with an unhealthy dose of anxiety and fear.
However, if you do your research and get the best personal credit rates on the market, it can be the right decision to better your financial status and meet your needs.
We hope that our guide has shed some light on the essential ways to improve your credit score and understand how it can affect your personal loan options.
And, if you’re hungry for more personal finance tips, then we’ve got you covered. Check out our finance and lifestyle sections for all the additional tips and tricks that can help you grow your personal wealth.