What Is the Average Loan Interest Rate?

The average loan interest rate ranges between 5 and 36 percent, but individual rates will vary depending on your credit history, income and the type of lender. 

This rate can hit upwards of 200 percent depending on the type of loan, the life of the loan, the lender you go with and your credit score. Before signing any loan agreement, it’s best to shop around to make sure you get the best rate possible based on your financial situation and credit score. Below, we break down what you need to know to get yourself in the best position to apply for a loan and get an interest rate that you can handle over the long term.

Types of Loans and Their Rates

There are various circumstances that warrant a loan, and loan interest rates can vary widely by category. Buying a new car, getting a mortgage, going back to school or starting your own business are the most common reasons to take out a loan.

When it comes to the lender you choose, the length of your loan and a variety of other factors (including your credit score), you might be facing anywhere from a 3 to 200 percent interest rate on the amount you’re looking to borrow.

To give you a better idea of what to expect when applying for a loan, we’ve outlined the most common loans and their average interest rates so you can plan ahead.

Average Auto Loan Interest Rates

The average auto loan interest rate is around 5 percent for a five-year loan. However, this percentage can skyrocket to 15 percent if your credit score is 600 or lower. Interest rates are lower across the board for used cars, though, so if you fall within the “average” or “poor” credit score range, it’s recommended to buy something used (or lease, in some circumstances) to avoid unnecessarily high interest rates and work on building your credit score over time.

Average Mortgage Loan Interest Rates

A good mortgage loan interest rate is 4 percent or lower, but rates can vary. And while the most common loans for buying a new home are for 15 or 30 years with fixed rates, there are other options available for veterans and those in lower-income brackets.

Average Student Loan Interest Rate

Student loans are a bit different than the auto and mortgage loans above. When it comes to federal student loans, the government sets a nationwide interest rate. These rates fall between 5 and around 8 percent and can change depending on the type of loan, who is borrowing and the level of school you are attending.

There are private loan options available for students as well, but they require payments earlier than most federal student loans. Private lenders also take into account the student’s credit score, unlike federal lenders, which can further increase your interest rate unless you have a cosigner with a long credit history.

Average loan interest rate by loan type

Small Business Loan Interest Rates

Typically, small business owners can expect to pay 3 to around 5 percent in interest when they take out a loan. But these rates can vary significantly depending on the lender (banks tend to offer a lower rate than online lenders, for example) and the loan amount. If you do choose to go with an online lender, or if you’re looking for a line of credit or a cash advance, your loan interest rate can hit up to 200 percent.

If you’re a small business owner or you’re thinking of taking your side hustle to the next level, you’re most likely familiar with small business loans. And you aren’t alone. 43% of small businesses applied for external financial health in 2018, according to a recent Federal Reserve Report.

Average Personal Loan Interest Rate

No matter the reason, interest on personal loan rates runs anywhere from 10 percent to a little over 30 percent, depending on your credit score, financial health, debt, annual income and the current state of the market. Personal loan rates can drop below 10 percent, however, if you use an online lender or take out an unsecured loan. 

From taking out a loan for a home remodel to paying for an unexpected health bill, personal loans offer a quick solution to unexpected financial hardship.

How Your Credit Score Affects Loan Rates

Your credit score is an indication to banks and online lenders how much of a risk they’re taking in loaning to you. If you have a long history of being an active credit card user and paying your bills on time, you’re seen as less of a risk and can receive a smaller interest rate. 

Credit scores can range from 300 to 850. A score of 650 or above is typically considered to be a good credit score, although what is considered good can vary by bank, lender and credit scoring model. Excellent credit scores fall within the 750 to 850 range and can significantly increase your lender’s confidence in your ability to pay them back. This can ultimately score you a lower interest rate.

Bad credit scores of 500 and under can sometimes disqualify you from receiving a loan at all, or send your interest rates up dramatically, meaning you may want to work to increase your credit score before applying for a loan of any kind.

What Else Affects My Loan Interest Rate?

While the type of loan and your credit score are significant factors for your average interest rate, there are other considerations lenders and credit unions account for when calculating your score. Some of those additional factors include:

  • Your credit history. This includes the amount of time you’ve had lines of credit open, your payment history, late payments and credit score pulls you’ve had over recent years.
  • Annual income and employment history. Lenders want to know that you’re in a secure place financially to take on a loan, so they often request proof of annual income to make sure you meet their requirements. Your industry can also come into effect here as stability and profitability can improve their confidence in you.
  • Loan size and length. While some loans have a timeline generally agreed upon by lenders and borrowers—like a 15 or 30-year mortgage loan or 60-month auto loan—others vary entirely based on borrower’s needs. But if you choose a longer loan term, you could pay up to 2 percent more in interest than if you stay with traditional loan lengths.
  • Type of loan and lender. The type of loan you need and the lender you choose will impact your interest rate. This is why shopping around is your best bet for securing the best interest rate.
  • Debt-to-income ratio. Another factor lenders look into when calculating your interest rate is the amount of debt you have incurred relative to your income. This includes credit card debt and other loans you have yet to pay off. Generally, in our experience, lenders are looking for a 35 – 45 DTI ratio (one more great reason to keep your DTI ratio low).
Factors that affect loan interest rates

What Is a Good Interest Loan Rate?

A good loan interest rate depends on a variety of factors, but typically anything under 10 percent is considered good—that’s around the national annual interest rate. But depending on the type of loan, an interest rate of 5 to 6 percent is one of the best rates you can get.

Secured Versus Unsecured Loans

A secured loan means that there’s some sort of collateral for the lender if you’re unable to make your payments, such as your car or house in auto and mortgage loans. And while this means that the lender is able to take the collateral if you don’t meet their payments, secured loans typically have lower interest rates.

Unsecured loans, while hosting higher interest rates, aren’t backed by any sort of collateral. A secured loan might be best for you If you’re confident you can pay back the loan in the allotted time, although you’ll run the risk of losing your car or home if you aren’t able to meet your required payments. Those who aren’t as confident should consider unsecured homes, to avoid a potential repossession of loaned items.

What's the difference between secured and unsecured loans?

Difference of Fixed and Variable Loan Interest Rates

A fixed loan interest rate simply means that the amount of interest you’re required to pay stays static over your entire loan, which keeps payments the same and avoids any surprises down the line. Fixed rates are recommended for long-term loans such as a mortgage or auto loan. A variable loan interest rate, also known as a floating loan interest rate, is a type of loan with a rate that can fluctuate over time depending on the market. This option is a bit riskier, but the rates tend to be lower to start with, making it a good choice for short-term loans that will get paid back quickly.

How to Apply For a Loan

Before applying for approval from a bank or lender, it’s important to take inventory of your own financial status and do plenty of research on the type of loan and lender that’s best for you. First, determine how much you need to borrow, your ideal interest rate and your credit score. These numbers will help you determine the types of lenders you can approach for pre-approval, as many of them have requirements on income and DTI that must be met to be considered for a loan. 

Once you find a few lenders that seem like good fits, applying for pre-approval is a great way to compare multiple quotes without pulling a full credit report, which can ding your score. From there, you can apply to the lender of your choosing based on your ideal rate.

Loans, while seemingly complicated, are pretty standard across lenders. Taking stock of your credit score, credit history and improving your overall credit education are key components to finding the best deal possible and ensuring that you don’t walk away with a high APR.

Posted in Credit 101
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