Low-interest personal loans are offered by banks, credit unions and online lenders. They come with annual percentage rates (APRs) below 12 percent to help consumers access the cash they need without spending a fortune in interest.

You’ll receive the loan proceeds in a lump sum and make monthly installment payments over a set period – usually two to five years. Most lenders allow you to use the funds however you see fit, although some impose spending restrictions.

If you’re considering a low-interest personal loan, you’ll likely need good or excellent credit to qualify. There are also other lending guidelines to be aware of before applying to give yourself the best chance at getting approved for funding.

How personal loan interest rates work

Lenders evaluate several factors to determine if you qualify for a low-interest personal loan including your credit score, employment status and debt-to-income ratio. However, your credit score plays the most significant role, providing insight into how you’ve managed past and current debt obligations and the likelihood of default moving forward.

FICO scores, which most lenders and creditors use to make lending decisions, range from 300 to 850 – the higher, the better. The most competitive rates are generally reserved for borrowers with excellent credit scores – between 720 and 850 – since the risk of defaulting on payments is lower. You could still get approved with a lower credit score but should expect steep borrowing costs.

The average personal loan interest rate for borrowers with excellent credit is between 10.73 percent and 12.5 percent. But if your credit score is categorized as average – or 630 to 689  – the average rate is between 17.8 percent and 19.9 percent.

Personal loan requirements

Each lender has its own eligibility requirements for personal loans. That said, here are some general guidelines to keep in mind before applying:

  • Credit score. Do you meet the lender’s minimum credit score threshold? If your credit score is lower, you’ll likely pay more interest or be denied financing altogether.
  • Income. Is your income consistent and verifiable? Lenders want to ensure you have the means to make timely monthly loan payments, and some have a minimum income requirement that must be met to be considered for a personal loan.
  • Debt-to-income (DTI) ratio. How much of your income is spent on monthly debt obligations? Even if you have a steady source of income, a DTI that’s too high could stretch your budget thin and cause you to fall behind on monthly loan payments. Your DTI should not exceed 40 percent to have the best chance at a low-interest personal loan.

How to qualify for low-interest personal loans

Some lenders offer online prequalification tools to view potential loan offers and rates without impacting your credit score. If you use this option and get turned down or find that the offers aren’t as attractive as you’d hoped, you’re not entirely out of luck. Consider taking the following actions to help boost your approval odds or qualify for better terms before applying for a loan.

Improve your credit score

An excellent credit score gives you the best chance of receiving a low-interest rate on a personal loan. If your score isn’t where you want it to be, check your credit report to see if there are errors that negatively impact your credit rating and file disputes promptly to have them removed.

Also, bring any past-due accounts current and continue making timely payments on all your other accounts. You can pay down credit card balances to reduce your credit utilization rate or the amount of your credit limits that are currently in use. It’s equally important to refrain from applying for new credit since each hard credit inquiry dings your credit score by a few points.

Get a co-signer

If the lender offers this option, consider applying with a co-signer to access a loan with better terms. This individual should have a stellar credit rating and a steady, verifiable source of income.

Be mindful that account activity will appear on the co-signer’s credit report, so keeping the loan current is vital to avoid adverse credit reporting. But if you default on the loan agreement, your co-signer will be on the hook for the payments.

Work with a credit union

Credit unions are nonprofit organizations that exist to provide banking solutions to their members. Their personal loan rates are often lower than you’ll find with traditional banks. According to the National Credit Union Administration, as of December 30, 2022, the average rate nationwide on a 36-month, fixed-rate personal loan was 9.66 and 10.40 for credit unions and banks, respectively.

You’ll need to apply for membership to work with a credit union. It’s restricted to individuals who work for a specific employer, are affiliated with a particular organization or live in a specific area. Some credit unions also extend membership to relatives of current members. This list is not exhaustive, so check with credit unions in your area to determine if you’re eligible for membership.

Sign up for an autopay discount

If you already qualify for the lowest rate the lender offers, consider enrolling in automatic payments if the lender offers an autopay discount. Although the discount is usually at or around 0.225 percent, the cost savings could add up over time. When signing up, be sure to account for the monthly expense in your budget to avoid overdrawing your account.

What to look for when shopping for a low-interest personal loan

Once you understand how interest rates on personal loans work and what most lenders require, the next step is to shop around for the best deal. Here’s what to look for when comparing lenders:

  • Interest and fees. Is the interest rate the lowest among your top selections? Are there origination fees, underwriting fees or early repayment fees? How does the APR (interest and fees) stack up to the competitors?
  • Loan terms. Does the lender offer varying loan terms? If you can afford the monthly payment on a loan with a shorter term, the lender may offer you a lower interest rate. But if you need a lower monthly payment, an extended term is ideal.
  • Online prequalification. Can you get pre-qualified online without dinging your credit score? These tools make it easier to shop around and avoid formally applying with lenders that aren’t a good fit.
  • Lender incentives. Are there referral bonuses? Can you receive a discounted rate for enrolling in automatic payments? Does the lender provide free access to your credit score?

Bottom line

An excellent credit score, consistent income and low debt-to-income ratio are ideal if you’re seeking a low-interest personal loan. But if your finances need a little work, consider taking a step back to improve your credit score and lower your utilization rate before applying. You can also try applying with a co-signer or signing up for an autopay discount to get a better deal if you wish to apply for a loan soon.

Most importantly, shop for the best low-interest personal loan deal. Consider getting pre-qualified, and be sure to compare your options before moving forward.