Researching personal loan interest rates at various banks in the USA does not determine what it will cost you to borrow money.
Lenders determine the price of money based on an individual’s credit score, income, and other factors. Banks publish wide ranges of possible personal loan interest rates for a reason.
Follow this four-part outline to learn the factors affecting your eligibility for the best deal.
- How credit scores drive the annual percentage rate
- Effect of income and employment on interest rates
- How state laws affect the price of money and approval odds
- Ranges of interest rates at banks versus online lenders
Personal Loan Interest Rates by Credit Score
Personal loan interest rates by credit score are the most important factor determining the cost of borrowing money without collateral. Lenders in the USA and elsewhere charge interest for two reasons.
- Compensate for the time value of money. This represents the current risk-free percentage paid only by the US federal government when it issues bonds.
- Overcome the projected defaults. This represents the additional risk-adjusted percentage that each individual must pay based their credit score and income.
Start a personal loan request here. Present your credentials to a network of lenders. Find out what interest rate corresponds to your current credit score. Choose the best offer if eligible.
APR vs Interest Rate
First, learn the difference between personal loan interest rates versus APR (Annual Percentage Rate). Most unsecured contracts based on a signature promise contain an upfront origination fee. The origination fee plus the annual percentage determines the total cost of borrowing money.
- Interest rate – the annual cost of money to a borrower expressed as a percentage
- APR – includes the interest rate plus any annualized fees in the percentage
Therefore, the APR is always higher than the interest rate because it includes upfront fees in the calculation. In addition, it is the better metric to track, because it reflects the total cost of using other people’s money.
The personal loan interest rate for excellent credit scores varies primarily by the length of the term. Longer repayment terms represent a greater risk of default simply because it is harder to forecast behaviors many years away.
A person with an excellent credit is someone with a FICO score above 760. The best deals go to the borrowers with high incomes and a solid work history.
This comparison table shows a narrow spread for the most qualified borrowers.
|Years||Low APR||High APR|
Personal loan interest rates for people with good credit scores have a much wider range because more borrowers fall into this category. Their work history and income may also show greater diversity.
A person with good credit is someone with a FICO score between 700 and 759. As you can see by comparing the figures above, these borrowers can still obtain the lowest fixed rate. It takes sufficient income and reliable verified employment.
This comparison table shows up to a 6-point range.
|Years||Low APR||High APR|
Personal loan interest rates for poor credit score borrowers begin climbing quickly to reflect the greater risk of default. The projected default percentage for applicants with FICO scores below 700 is up to five times higher than for the most qualified applicants.
Bad credit borrowers face declinations or a high price of money if approved.
This comparison table shows a 16-point range with a hefty minimum.
|Years||Low APR||High APR|
Personal Loan Interest Rates by Income & Employment
An individual’s income and work history also affect personal loan interest rates in the USA. Banks look more favorably at applicants with higher incomes and more stable job situations.
First, a borrower needs to demonstrate sufficient income to cover the projected monthly payment. Then, the borrower needs to show that the income is likely to continue for years to come. This is where work history and employer stability comes into play.
Debt to Income
The Debt-To-Income ratio (DTI) affects personal loan interest rates. Lenders calculate the DTI by dividing the projected monthly payments gross monthly income.
DTI = monthly debt service payments/gross monthly income
Borrowers with a higher DTI tend to pay more to borrow money in order to compensate for the greater risk of default. People who must devote a large portion of income to debt service are more likely to encounter payment problems in the future.
Earn an interest rate reduction by lowering the monthly payment if you have a high DTI near a lender threshold. Smaller amounts borrowed and longer terms both do the trick.
Employer stability and borrower work history also contribute to personal loan interest rates. Borrowers able to demonstrate that earnings are likely to continue are less risky. They pay a lower percentage compared to other applicants with otherwise similar credentials.
- Government employees often have great job security. Civil service regulations prevent agencies from firing workers without a good cause reason that follows federal regulations.
- Corporate employees often have good job security. Large established corporations are more likely to stay in business than a smaller entity.
- Self-employed individuals must be able to document at least two years or more of stable earnings. Signed tax returns often do the trick. Doctors are often self-employed.
- Senior citizens often have low, but predictable future earning streams. Social Security Benefits are reliable as are many defined benefit pension plans.
- Students often have a poor work history combined with very unreliable sources of future earnings. Their heavy expenses for tuition, room, and board make them poor candidates.
H1B Visa Holders
Personal loan interest rates for H1B visa holder corporate employees are higher at banks in the USA. Many foreign nationals temporarily work in the United States in specialty occupations. Technology consulting companies hire many of these temporary workers with specialized skills.
Many H1B visa holders earn high incomes and work for large stable corporations. However, despite these strong qualifications, they rarely qualify for the best deals. They face two dilemmas.
- Their USA-based consumer report is too thin or has a short history.
- They may return to their home country before repaying the loan.
Specialty banks have emerged to serve the needs of H1B visa holders working in the technology consulting arena. For example, HDFC offers personal loans for corporate employees working at many USA-based companies.
- Cognizant Technology Solutions (CTS)
- Tata Consulting Services (TCS)
- Wipro Enterprises Limited
Personal Loan Interest Rates by State
Personal loan interest rates in the USA also vary by the state where the borrower lives. Banking laws in the United States consist of both federal and state-level regulations. Many of these laws overlap, and contradict one another, making them difficult to interpret without a lawyer.
Many of these state-based rules can affect the percentage charged to use other people’s money.
- Usury laws cap the percentage individuals can charge residents in each state. However, licensed national lenders are often exempt. The rules are complex and confusing.
- State-based lending laws also stipulate the minimum loan size. This mostly affects payday loans, but can also influence the percentage of smaller amounts.
Personal loan interest rates in New York State and NYC are difficult to determine. The state lending laws cause a great deal of confusion for banks and borrowers. Many lenders play it safe by avoiding the market, or by serving only consumers with excellent credentials.
New York State laws define interest rates exceeding 16% as civil usury and those topping 25% as criminal usury.
Personal loan interest rates in California vary significantly by the amount borrowed.
The California Finance Lenders Law caps the percentage of loans of $2,500 or less. This cap makes it unattractive for many lenders to approve these small amounts. Therefore, do not expect to find many offers in this range.
The same California law places no percentage restrictions on loan of $2,500 and above. Therefore, expect to find a wide range of offers beginning at $2,600.
Personal Loan Interest Rates at Different Banks
Researching personal loan interest rates at various banks, credit unions, and online lenders in the United States is almost pointless. Picking the company that publicizes the lowest price of money means nothing.
Each lender determines the fixed interest rate to charge based on an individual’s credentials. However, traditional banks and online lenders do target slightly different borrower profiles and offer unique customer experiences. Therefore, we reluctantly cover the topic.
Traditional brick and mortar banks in the United States tend to publish the lowest personal loan interest rates. However, this does not automatically make them the ideal choice for every borrower.
Traditional banks often source their funding through deposits (checking and savings accounts). FDIC reserve requirements force them to lend more conservatively. Therefore, borrowers often encounter three issues.
- First, traditional banks lend primarily to people with good to excellent credentials. Consumers with marginal qualification rarely obtain the lower published percentage, or they receive a declination letter.
- Second, many traditional banks focus on secured contracts such as mortgages and auto financing. Either, they do not offer riskier unsecured personal loans at all, or it is a side business.
- Third, traditional banks that do offer personal loans are hoping to deepen relationships with existing customers. They find that retention improves with the number and variety of financial products each customer has.
This comparison table of traditional bank personal loan interest rate illustrates these points.
|Bank||Low APR||High APR||Comments|
|Bank of America||Does not offer|
|Chase||Does not offer|
|Discover||6.99%||24.99%||No origination fees|
|Navy Federal||Based on length|
|Wells Fargo||Score, length, location|
|USAA||Does not publish|
Online lenders in the United States tend to publish a broader range of personal loan interest rates. These online lenders are non-banks. They do not acquire capital through deposits and do not have to meet the same reserve requirements.
Non-bank online lenders obtain their capital from investors seeking a high return on investment. Therefore, they often operate differently and target specific types of borrowers.
- First, they can approve more applications from marginal applicants. They charge a higher APR to these customers to improve investor ROI.
- Second, many online lenders focus on unsecured personal loans. By specializing, they act more aggressively and creatively in the marketplace.
- Third, they can offer competitive prices to people without an existing checking or savings account relationship.
This comparison table of online lender personal loan interest rates illustrates these points.
|Online Lender||Low APR||High APR|