What is a Good APR for a Personal Loan?

Getting a personal loan can be a wise financial decision that may help you pay off some debt and consolidate your payments into a single package. Depending on your needs, it can also provide financing for a career change or new business. However, you shouldn’t just take the first loan you find but must do careful research to ensure you find the best option possible.

For example, you need to ask yourself, “What is a good APR for a personal loan?” correctly answer this question. Thankfully, we’ve done the hard work for you! In this article, you’ll learn about APRs on personal loans, what constitutes a reasonable APR, and things you can do to improve yours. This information should ensure you receive an outstanding personal loan!

What Is the Best APR for a Personal Loan?

A good APR (annual percentage rate) for a personal loan will vary heavily based on multiple factors (which we’ll discuss later) but typically range from 4-36%. Currently, the average APR for a personal loan for someone with a credit score of 720 or higher is about 20% for 3-5 year repayment schedules.

What Exactly Is an APR?

The APR on a personal loan isn’t just the interest rate. Instead, it consists of the interest and the fees that you pay over a year for the money that you’ve borrowed. It’s a figure used to compare the cost of borrowing for things like auto loans, mortgages, personal loans, and credit cards. Companies use it to determine how much you’ll pay in total and how much you pay monthly.

Your Lender Can Help You

As you might imagine, your APR is a reasonably complex element and requires a lot of careful calculation to fully understand. Your lender will sit down with you and explain your APR to ensure that you know how it was calculated and why they’re offering it to you. That said, you should understand this process yourself to improve your negotiations.

How Do Companies Calculate Your APR?

Before setting up your personal loan, lenders will take your interest rate and use it to calculate your APR. The process is the same for all personal lenders, meaning that you can expect similar results from most. Here’s an example of this process in work:

If all this is confusing to you or you consistently get a number that doesn’t make sense, you can use an APR calculator to gauge your rate ahead of time. This step is brilliant because it gives you an idea of whether your lender is providing a fair rate to you or not. While a higher offered APR doesn’t mean they’re trying to scam you, it’s worth pointing out to them in negotiations.

Does APR Differ From Your Interest Rate?

While some lenders may use the terms “APR” and “interest rate” interchangeably, they’re not at all the same thing! In fact, as you guessed by reading the section above, the interest rate is used to calculate the APR and is a separate thing altogether. It represents the cost of borrowing money as a percentage, while the APR includes all the costs of borrowing, which includes the interest rate, fees, and other charges. That means your APR is almost always higher than your interest rate.

Can Your Interest Rate and APR Be the Same?

Is it possible that your APR and interest rate will be the same? There’s an infrequent possibility that your lender may charge no fees with your loan: in that case, the APR and interest rate are the same. Don’t hold your breath waiting for that to happen, though: there’s a better chance of getting struck by lightning while winning the lottery during a shark attack.

Which Factors Affect APR?

When lenders set your APR, they typically look at several different factors, including your interest rate. They’ll decide your interest rate based on multiple elements. These can vary depending on the lender but usually include things like your:

• Credit Score: You typically want the highest credit score possible to get a great APR on your personal loan. A score of over 740 will provide the best APR by lowering your interest rates.
• Debt-to-Income Ratio: Debt-to-income ratios (DTIs) represent how much of your income goes towards your debt every month. A higher DTI indicates a riskier loan and will raise your APR. Typically, 36% or less is heavily preferred.
• Employment Type: Do you have a full-time, salaried position? Congratulations! You’ll likely qualify for a much lower interest rate and APR. Those who own a small business or who are self-employed are considered “less stable” economically.
• Income: How much money do you make every year? That can affect your APR. Typically lenders will lower your APR if you make more money because you’re a less risky investment.
• Loan Size: Larger loans often scare banks or lenders because they’re inherently more risky. As a result, a high-principal loan almost always comes with steeper APRs.
• Term Length: How long are you planning on taking to repay your loan? Loan term length heavily impacts interest rates and APRs. The longer your loan term, the higher your APR.
• Collateral: Offering collateral on a loan will result in lower interest rates because they’re far less risky. Why? Well, if you default on your loan, the lender can take the collateral and recoup some of their investment.
• Benchmark Rates: Lastly, lenders use benchmark rates like the Secured Overnight Financing Rate or the London Interbank Offered Rate to dictate rates to borrowers.

What Is a Good APR: How To Improve Your Rate

Did your lender offer you an APR higher than you wanted? That’s not unusual but can be very frustrating. However, it’s possible to manage this problem if you’re smart. You have power here! So, if you’re worried about your APR and think it might end up higher than you’d like, the following steps can improve your rate:

These steps require a little work but may improve your chances of a better APR. At Goalry, we can help you identify a lender that suits your financial status and which is comfortable providing a fairer and more consistent APR. While we can’t lend you money ourselves or promise that the steps mentioned above will work for you, we do believe that they’re the best options available for someone trying to raise their APR.