This week’s personal loan rates fall for 3-year loans, while 5-year terms rise

Borrowers with good credit seeking personal loans during the past seven days prequalified for rates that were lower for 3-year loans and higher for 5-year loans when compared to fixed-rate loans for the seven days before.

• Rates on 3-year fixed-rate loans averaged 15.46%, down from 15.69% the seven days before and up from 14.93% a year ago.
• Rates on 5-year fixed-rate loans averaged 19.88%, up from 19.66% the previous seven days and from 17.57% a year ago.

Personal loans have become a popular way to consolidate debt and pay off credit card debt and other loans. They can also be used to cover unexpected and emergency expenses like medical bills, take care of a major purchase, or fund home improvement projects.

Average personal loan interest rates have decreased over the last seven days for 3-year loans and increased for 5-year loans. While 3-year loan rates fell by 0.23 percentage points, rates on 5-year loans rose by 0.22 percentage points. Interest rates for 3- and 5-year terms remain higher than they were this time last year, up 0.53 percentage points for 3-year terms and up 2.31 percentage points for 5-year terms.

Still, borrowers can take advantage of interest savings with a 3- or 5-year personal loan, as both loan terms offer lower interest rates on average than higher-cost borrowing options such as credit cards.

But whether a personal loan is right for you depends on multiple factors, including what rate you can qualify for, which is largely based on your credit score. Comparing multiple lenders and their rates helps ensure you get the best personal loan for your needs.

For the month of June 2024:

• Rates on 3-year personal loans averaged 23.02%, up from 22.35% in May.
• Rates on 5-year personal loans averaged 24.81%, up from 24.52% in May.

In June, the average prequalified rate selected by borrowers was:

• 13.18% for borrowers with credit scores of 780 or above choosing a 3-year loan
• 32.55% for borrowers with credit scores below 600 choosing a 5-year loan

Depending on factors such as your credit score, which type of personal loan you’re seeking and the loan repayment term, the interest rate can differ.

As shown in the chart above, a good credit score can mean a lower interest rate, and rates tend to be higher on loans with fixed interest rates and longer repayment terms.

A lot happened this week in the world of interest rates.

The Bureau of Labor Statistics (BLS) reported on Wednesday that inflation slowed in May, raising hopes for multiple interest rate cuts in 2024. Later that day, the Fed concluded its June meeting, signaling one cut by the end of the year while holding rates steady. As of now, we anticipate one 25 basis point (0.25 percentage points) cut this year, and a 100 basis point (1 percentage point) cut in 2025.

Currently sitting at 5.25% to 5.50%, the federal funds rate is the highest it’s been since 2001. Sticky inflation and low unemployment had made any cuts seem unlikely as of a week ago. But the news may deliver relief for borrowers burdened with high interest costs and those considering a loan. However, demand for personal loans has increased and all signs point to this trend continuing, while debt levels and delinquency rates have risen as well. This may indicate more consumers will struggle to be approved at low rates or at all — even if we see rates fall.

Many factors influence the interest rate a lender might offer you on a personal loan. But you can take some steps to boost your chances of getting a lower interest rate. Here are some tactics to try.

Generally, people with higher credit scores qualify for lower interest rates. Steps that can help you improve your credit score over time include:

• Pay bills on time: Payment history is the most important factor in your credit score. Pay all your bills on time for the amount due.
• Check your credit report: Look at your credit report to ensure there are no errors on it. If you find errors, dispute them with the credit bureau.
• Lower your credit utilization ratio: Paying down credit card debt can improve this important credit-scoring factor.
• Avoid opening new credit accounts: Only apply for and open credit accounts you actually need. Too many hard inquiries on your credit report in a short amount of time could lower your credit score.

Personal loan repayment terms can vary from one to several years. Generally, shorter terms come with lower interest rates, since the lender’s money is at risk for a shorter period of time.

If your financial situation allows, applying for a shorter term could help you score a lower interest rate. Keep in mind the shorter term doesn’t just benefit the lender – by choosing a shorter repayment term, you’ll pay less interest over the life of the loan.

You may be familiar with the concept of a cosigner if you have student loans. If your credit isn’t good enough to qualify for the best personal loan interest rates, finding a cosigner with good credit could help you secure a lower interest rate.

Just remember, if you default on the loan, your cosigner will be on the hook to repay it. And cosigning for a loan could also affect their credit score.

Before applying for a personal loan, it’s a good idea to shop around and compare offers from several different lenders to get the lowest rates. Online lenders typically offer the most competitive rates – and can be quicker to disburse your loan than a brick-and-mortar establishment.

But don’t worry, comparing rates and terms doesn’t have to be a time-consuming process.