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Personal loan rates have risen since the Federal Reserve began implementing interest rate hikes to fight inflation. While getting the best rate is always critical to lowering the overall cost of your loan, regardless of economic conditions, it’s even more crucial when loan costs are rising, as they are now and are expected to be. be in 2023.
Follow these four steps to get the best personal loan rates in 2023.
1. Improve your credit score
Lenders typically use your credit score to determine your interest rate, and they usually reserve the best rates for applicants with the highest scores. For example, applicants with scores of at least 720 are most likely to get the best personal loan rates.
Before you apply for a personal loan in 2023, take the necessary steps to improve your credit score to access these competitive rates. Action items that can have a significant positive impact on your score include:
- Pay off any existing debt as quickly as possible.
- Review your credit report to ensure it is accurate and free of errors or discrepancies. Contact the reporting agency to file a dispute, if necessary.
- Make on-time payments each month for all your debts.
Improving your credit score before you apply can save you hundreds or thousands of dollars in interest.
2. Increase your income
Your credit score isn’t the only factor that determines your overall creditworthiness and risk as a borrower. Lenders also consider your income, as it indicates your ability to repay new debt. For example, if you have a low monthly or annual income, lenders may not be willing to approve your application or they may charge you a higher interest rate for the added risk.
If you have limited income, it is in your best interest to increase your income before applying or to wait to apply until you have enough income to afford a personal loan. It can also help you get better interest rates.
There are several home side business or small business ideas that can help you increase your income. Some of them include virtual assistants, dog daycare, selling online lessons, online tutoring, writing services and property monitoring, among others.
3. Pay off existing debt
Lenders also consider your debt-to-income ratio (DTI), which is a measure of your monthly debts divided by your gross monthly income. The lower your DTI, the less risk you pose; the less risk you pose, the lower your interest rates.
Increasing your income is one way to reduce your DTI; however, not everyone is able to get a better paying job or start a new side hustle among their other responsibilities. Paying off your existing debt is another way to reduce your DTI, which may be more doable than increasing your income.
Plus, paying off your existing debt will likely boost your credit score, making it a great method to get lower interest rates.
4. Prequalify with multiple lenders
Many lenders offer a prequalification process, which lets you know what rates and terms you can qualify for without hurting your credit score. Although these conditions are not guaranteed until you submit a formal application, prequalification gives you a good idea of what offers may be on the table.
When you prequalify with multiple lenders, you’re essentially creating a portfolio of offers that you can compare and choose from. Instead of blindly choosing a lender in the market and hoping for the best rates and terms, you can compare multiple offers to make sure the loan you choose is the best one for your situation.
Once you’ve found an offer you like, you’ll need to submit a detailed formal application. This will require a rigorous credit check, which will temporarily affect your credit score. Your score usually bounces back quickly as long as you make payments on time.
5. Consider using a co-borrower or co-signer
If factors like your credit score or income prevent you from getting great personal loan rates, it may be worth applying to a more creditworthy co-borrower or co-signer.
- Co-borrower: Co-borrowers have full access to loan funds or financed assets and are responsible for payments throughout the life of the loan. They hold the same liability as the primary borrower.
- Co-signer: Co-signers are generally only used to strengthen the creditworthiness of an application. They do not have access to the loan money and only become liable for payment if you, the primary borrower, do not repay.
If using a co-borrower or co-signer seems to benefit your situation and help you get lower rates, consider a joint personal loan or co-signer loan.
How to find the best personal loan rates
The best personal loan rates are usually available from online lenders; However, some traditional banks may also offer competitive rates. Since lenders generally reserve the best rates for creditworthy borrowers, it is essential to improve your creditworthiness by taking one or more of the following actions:
- Improve your credit score
- Increase your income
- Repay existing debt
- Prequalification with multiple lenders
- Consider using a co-borrower or co-signer
Forbes Advisor has evaluated 29 popular lenders to identify which offer the best personal loan rates. Some of these major lenders include LightStream, Wells Fargo, PenFed, Discover, and Marcus.
Featured Partner Offers
5.99% to 21.49%
$5,000 to $100,000
Minimum credit score
5.74% to 21.74%
$3,000 to $100,000
5.99% to 17.99%
$600 to $50,000
6.99% to 24.99%
$2,500 to $35,000
Minimum credit score
Marcus does not disclose this information
6.74% to 19.74%
$3,500 to $40,000
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