Like loan amounts, interest rates vary among lenders. As a rule, though, lenders charge borrowers higher interest rates for personal loans than for other types of loans. Average interest rates for personal loans range from 16 to 30 percent, according to BankBazaar.com. Inquire about the rates several different lenders charge before applying for a personal loan with a particular lender.
Variable Vs. Fixed Interest Rate
Compare interest rates before deciding on a loan. Variable interest rates may seem lower at first, but the rate can change over the term of the loan whereas a fixed interest rate will remain the same. Choosing a loan with a fixed rate of interest could save you money in the long run. If you consider taking out a loan with a variable interest rate, find out what the rate cap is limiting how much the interest can increase within a specified period of time. Lifetime interest rate caps limit the amount of interest a lender can charge during the term of the loan.
If you belong to a credit union, apply there first for a personal loan. Qualifying for an unsecured personal loan could get you an interest rate one or two percentage points lower than a bank would offer you. Unlike banks that operate to earn a profit, credit unions are nonprofit financial institutions that return earnings to members by offering them lower interest rates on loans. Although no collateral is required for personal loans, some credit unions will give you a lower interest rate on the loan if you borrow against your deposit balance.
You might be able to get a lower interest rate if you apply for a loan at a small community bank rather than a major commercial banking institution. This is especially true if you are an established customer with good credit. If your credit score needs improving, a community bank is often more flexible in its lending requirements. Community banks continue to offer qualified customers personal loans at rates that average between 5 and 12 percent. Terms can vary from customer to customer depending on your credit, current income and length of history with that bank.
Secured Vs. Unsecured Loans
Since most personal loans are issued as unsecured loans, they pose more of a risk to lenders. That's why interest rates for unsecured personal loans are higher than for loans secured with collateral. Assets used as collateral lower the risk to the lender thereby lowering the interest rate on the loan. Lenders consider that if you have something to lose, you are less likely to default on repaying the loan. In many cases, the rate on an unsecured personal loan can be more than 10 percent, as reported by LendingTree. The interest rate on a home equity loan for the same amount of money is normally lower, and unlike the interest you pay on a home loan, the interest you pay on a personal loan is not tax deductible.