Low-interest personal loans are offered by banks, credit unions and online lenders. They come with competitive annual percentage rates (APRs) — below 11 percent — to help consumers save money on interest.

You’ll receive the loan proceeds in a lump sum and make monthly installment payments over a set period — usually two to seven 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, as it lets lenders know how risky of a borrower you are based on how well you’ve managed your loans and other financial products in the past.

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 it may be difficult to get approved and you can expect a higher interest rate and more fees.

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. However, there are some general guidelines that most lenders require 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. 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 35 percent to have the best chance at a low-interest personal loan.

How to qualify for low-interest personal loans

If you’re looking to secure the lowest possible interest rate on a personal loan, these seven steps could help you do just that.

1. Know your credit score

An excellent credit score gives you the best chance of receiving a low-interest rate on a personal loan. Before applying, check your credit report to ensure your score is in the best shape and that there aren’t any errors that are negatively impacting your credit.

If there aren’t any mistakes on your report, but your score could use some improvement, try to bring any past-due accounts current and continue making timely payments on all your other accounts. It’s equally important to refrain from applying for new credit since each hard credit inquiry dings your credit score by a few points.

2. Pay down debt

When you apply for a loan — or any credit product — lenders will look at your DTI ratio to determine whether you can afford your potential monthly payment. If your debts take up 35 percent or more of your monthly gross income, consider paying down some of those balances before applying for a loan. This will not only increase your approval odds but could help you secure a lower rate as you will be seen as a less risky borrower.

3. Research all your options

Personal loans aren’t a one-size-fits-all type of product, and each lender has something different to offer. Before settling for one, research the terms, interest rates, fees, loan amounts and extras offered by at least three different lenders to ensure you get the best loan for your credit profile.

If you aren’t sure where to start, check out Bankrate’s list of best personal loans. This list has a complete breakdown of the pros and cons of each lender, along with the minimum requirements by each to help you narrow down your choices.

4. Look for discounts

If you already qualify for the lowest rate the lender offers, see if there are any additional rate discounts you could get. The most common discount offered by lenders is the autopay discount, which can usually help you knock off at least 0.25 percent of your rate. Some lenders also offer discounts for applying with a qualified co-borrower, for having another type of account with them or for having retirement assets.

5. Only apply for the amount you need

It’s possible that you may get approved for a greater amount than what you were originally looking for. However, the lower your loan amount, the lower your interest rate will be. Likewise, by only borrowing what you need, you’ll be able to have a more manageable monthly bill than if you borrow a higher amount.

Crunch the numbers before you apply, and make sure to consider any lender fees that may eat away at your initial deposit, as you also don’t want to come up short.

6. Consider credit unions

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 March 31, 2023, the average rate nationwide on a 36-month, fixed-rate personal loan was 10.02 and 10.75 for credit unions and banks, respectively.

You’ll need to apply for membership to work with a credit union, and membership may be 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. However, every credit union is different, so look into all of your local options before applying to ensure that you meet the minimum requirements.

7. Apply for prequalification

Most lenders allow borrowers to check their rates before they formally apply for a loan through loan prequalification. For this step, you’ll need to provide your contact information, as well as your estimated gross income, date of birth and Social Security number.

The best part about prequalifying for a loan is that you’ll know exactly what you may be eligible for with that specific lender without hurting your credit, as lenders only need to do a soft pull for this step.

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.
  • Customer service. Does the lender have good customer reviews on websites like the Better Business Bureau or Trustpilot? Do they offer 24/7 customer support? Can you go to a physical branch or do they only offer assistance via chat or over the phone?
  • 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 or unemployment protection? These are all factors that can enhance the overall borrowing experience.

Bottom line

An excellent credit score, consistent income and low debt-to-income ratio are key if you want to secure a low-interest personal loan. But if your finances aren’t in the best shape, consider taking a step back to improve your credit score and lower your utilization rate before applying.

If you can’t wait and need the funds as soon as possible, you can also try applying with a co-signer or signing up for an autopay discount to get a better deal. Most importantly, shop for the best low-interest personal loan for your credit situation, pre-qualify when possible and be sure to compare your options before signing on the dotted line.