How Do Personal Loan Interest Rates Work?

When it comes to borrowing money, a personal loan is one of the most flexible financial tools that meets various needs. Whether it’s a sudden home repair, an unexpected medical expense, or an unforeseen unemployment, a personal loan can offer quick and easy access to funds.

Although quite handy, personal loans do come with a caveat. They usually have higher interest rates as compared to other types of loans. Therefore, it’s important to learn about personal loan interest rates before you apply for one. 

So how do personal loan interest rates work? In this guide, we will help you understand how personal loan interest rates work, what factors affect them, and what the current personal loan interest rates are. Read on to discover what to expect when applying for a personal loan.

What Are Personal Loan Interest Rates?

Personal loans are unsecured loans that come with predetermined monthly payments. These payments are to be made over a specific time period and include a monthly interest rate.

Personal loan interest rates are calculated as a percentage of the principal amount. It is applied to your loan every year and is known as the nominal annual percentage rate (APR). 

Your APR includes the interest rate and any fees and other costs associated with the loan. However, it does not include the compounding interest costs or interest rate fluctuations due to inflation.

Personal loan lenders use the monthly periodic rate by dividing the APR by 12. It is applied to the principal and represents any additional cost that you are obliged to pay for borrowing the principal amount.

How Do Personal Loan Interest Rates Work?

Banks, credit unions, and online lenders offer loans by borrowing money from their customers’ deposits or other banks. This, of course, comes at a cost, known as interest.

The personal loan interest rate is the cost of borrowing money and also accounts for the risk of lending money without any guarantee of getting it back. Read on to find out how it is calculated.

Factors That Affect Personal Loan Interest Rates

Your personal loan interest rate is determined by the following factors:

1. Your Creditworthiness

When it comes to making a lending decision, lenders always look at your creditworthiness before approving a loan. Your creditworthiness shows how much of a risky borrower you are. If your credit rating is high, you will get a better interest rate as there will be a lower risk of default.

2. Your Employment Status

Your employment status is yet another factor that helps lenders determine the interest rate on your personal loan. Along with your monthly income, it reflects the likelihood of loan repayment. The higher your monthly income, the lower your interest rate, and vice versa. 

3. Federal Funds Rate

Another factor that determines your interest rate is the current cost of borrowing. Lenders and banks borrow money for loans from other financial institutes. It comes at an interest rate, which is calculated according to the federal funds rate. 

It is a benchmark rate that affects all interest rates. The higher the federal funds rate, the higher the interest rate will be for personal loans.

4. Your Loan Term

The length of the loan also impacts its interest rate. If your loan term is long, the lender will end up making more money from accrued interest. Therefore, you will get a lower interest rate. 

But if you get a short-term personal loan, the interest rate will be higher as the interest accrued will be low. Your lender may also charge a prepayment penalty to make up for the lost interest earnings if you pay off your loan early.

What Are the Current Personal Loan Interest Rates?

Personal loan interest rates vary significantly, depending on the lender and your credit score. On average, the current APR for personal loans for all credit tiers is about 21.57%. It can go as low as 12.42% and as high as 35.99% according to your credit score. 

Get a Personal Loan At the Most Affordable Rates Today!

At Cash in Minutes, we offer the most affordable personal loans in Utah. With the most competitive APRs, same-day funding, and easy repayment terms, we are one of the most sought-after lenders in the state.

Apply for a personal loan online today and get your funds the same day!