Interest is charged on personal loans partially as the cost for receiving a service and partially as compensation to lenders for potential interest they lose on money paid out to you. The amount of interest charged is based on numerous factors, the most significant of which is your credit score.
Interest charged on personal loans is called an annual percentage rate (APR). APRs can be fixed or variable. Fixed APRs remain the same for the entire length of the loan. Variable APRs change based on fluctuations in the prime rate or market index rate.
Most personal loans have fixed APRs. Personal loans with variable rates are regulated to prevent rates from rising to an unethical level. Lending institutions often offer a wide range of APRs on personal loans.
Lower APRs apply to lower risk factors and higher FICO scores. Higher APRs apply to higher risk factors and lower FICO scores.
The average APR for personal loans is 9.41% but rates can be much lower for borrowers with good credit, or exceptionally higher for bad-credit applicants receiving short-term, high-risk loans.
Getting the Best APR on a Personal Loan
Getting the best APR on a personal loan starts by having a high FICO score and overall strong credit rating. Maintaining good credit is a lifelong effort but some short-term credit repair options do exist.
Knowing your credit score in advance and comparing rates and terms between multiple lending services prior to submitting any applications can also help get you the best APR available.