Why Are Personal Loan Rates So High? (Plus Tips on How to Lower Them)

Personal loan rates are usually high because they’re unsecured, meaning there’s no collateral. Learn how to secure a low rate on a personal loan.

Updated: September 20, 2023

Navient may receive compensation when you click on links associated with this Navient Marketplace. Navient is not being compensated for any application, quotation, or the purchase of any financial products.

A personal loan can be a useful tool for consolidating debt, making a significant purchase, or funding home renovations. But if you’ve shopped around for one, you may have noticed that their interest rates can be higher than other types of loans, like home equity loans or car loans. So, why are personal loan rates so high? And what can you do to lower them?

Key takeaways

  • Personal loans are typically unsecured, which means there’s no collateral to back the loan.

  • Your credit score plays a significant role in determining your personal loan interest rate, and a poor credit score can result in a higher interest rate. 

  • Longer loan terms may come with higher interest rates, which allow lenders to mitigate the risk of future interest rate fluctuations.                                                                                 

  • When the interest rates set by central banks rise, personal loan rates tend to follow suit. 

Six reasons personal loan rates can be high 

Considering a personal loan? You might be surprised to find that their rates are higher than you expected. Here are six reasons why that can happen. 

No collateral 

One reason why personal loan rates are higher than other types of loan rates is that personal loans are often unsecured, meaning they do not require collateral. This is in contrast to secured loans, like auto loans and mortgages, where the lender can seize the asset to recoup their losses if a borrower fails to repay the loan. With an unsecured loan, lenders face a greater risk of late payments or non-payment. That forces lenders to charge a higher interest rate to make up for any potential losses.

Credit score

Another factor that can influence personal loan rates is the borrower's FICO score. Your credit score is based on a range of financial data, including past credit history, payment behavior, and length of credit history. Generally, the higher the credit score, the lower the loan's interest rate. Borrowers with lower credit scores are considered riskier to lenders, so lenders may charge these borrowers higher interest rates to compensate for the higher risk.

Loan amount and term

Loan amount and term can also impact APR (annual percentage rate). Often, larger loan amounts or longer terms result in higher interest rates. With larger loan amounts, lenders are taking on risk by providing a more significant chunk of capital. With longer-term loans, there is more time for everything from economic factors to financial changes to increase the risk of missed payments.

Economic factors

The state of the broader American economy can also affect unsecured personal loan rates. During times of economic uncertainty, financial institutions may raise interest rates to cover the increased risk. Additionally, as inflation increases and the Federal Reserve raises national rates, borrowing costs will naturally follow.

Lender-specific factors

Lender-specific factors can also impact personal loan rates. Where one lender may not be willing to serve someone with a lower credit score, another might have a different, more holistic way of measuring creditworthiness that opens up their range of qualified applicants. That’s why it’s important to do your research and shop around for multiple quotes before settling on a personal loan provider.

When borrowing a personal loan makes sense 

Taking out a personal loan can be a useful financial tool for some people. However, it's essential to evaluate your individual circumstances carefully before deciding whether borrowing money through a personal loan is the right choice for you. Here are a few scenarios when taking out a personal loan can make sense:

Debt consolidation

Even when personal loan rates are high, they’re still generally lower than credit card rates. That’s why one of the most common reasons people take out personal loans is to consolidate high-interest credit card debt. If you’re in this position, taking out a personal loan to use as a debt consolidation loan can reduce the amount of interest paid over the life of the loan and potentially help pay off debt faster.

Large purchases

Let’s say you plan on making a significant purchase, such as a car or furniture. In that case, a personal loan may be a better option than using a credit card, which can carry a much higher interest rate. That said, if national rates are high now, or your credit score isn’t in ideal shape to qualify for a lender’s lowest rates, you may want to put that purchase on pause if you can. 

Emergency expenses

There are times when you can’t wait for the ideal conditions to borrow a personal loan. In case of unforeseen expenses, like medical bills, home emergencies, or other unexpected bills, a personal loan can help cover the costs. They can provide quick access to funds when you need them the most, potentially avoiding high-interest credit card debt.

Home improvements 

If you’re looking to make significant home improvements or repairs, a personal loan can be a good funding source. Though you may get the best rates with a home loan or a home equity line of credit (HELOC), you’ll also have to put up your home as collateral. That means if you default, the lender has the right to take your property. If you’re not comfortable with that idea, a personal loan may be a better option. 

What you can do to secure a lower rate on a personal loan 

Fortunately, there are ways to secure a lower interest rate on your next personal loan. This can save you money and make it easier for you to reach your financial goals. Here’s how to get a more favorable rate. 

1. Improve your credit score

A good credit score is key in securing a lower interest rate on a personal loan. You can improve your creditworthiness with these strategies:

  • Regularly review your credit reports to ensure accuracy. Dispute any errors or inaccuracies and have them corrected promptly. 

  • Aim to reduce any credit card balances to below 30% of your total credit limit. So, if your total credit limit is $10,000, aim to have no more than $3,000 in credit card debt at any given time. Low credit utilization has a positive impact on your credit score. 

  • Consistently make on-time payments for all your bills, including credit cards, loans, and utilities. If staying organized is hard for you, sign up for autopay so you never miss a payment. 

  • If you have a diverse mix of credit accounts — such as credit cards, installment loans, and a mortgage, for example — this shows that you can balance many types of debts responsibly. 

  • The length of your credit history can affect your credit score. Avoid closing old credit card accounts, even if you don’t use them often. 

  • Only open new credit accounts when necessary. Each time you apply for credit, it leads to a hard inquiry on your credit report, temporarily lowering your credit score. Too many accounts can also lead to a temptation to overspend. 

2. Use a lending marketplace

Lending marketplaces, such as Navient Marketplace, are online platforms that connect borrowers with loan offers from a wide network of investors and lenders. They offer an efficient way to shop for financial products and to discover the best personal loan for your financial needs. Plus, because personal loan marketplaces facilitate competition among lenders, you’re more likely to secure a loan with a competitive interest rate. 

Marketplaces are also useful for comparing options. They allow you to view interest rates, loan terms, origination fees, and other features all in one place. That side-by-side comparison can help you make sure you’re getting a good deal. Further, most marketplaces allow you to prequalify for multiple loans at once. Prequalification is usually fast, free, and won’t affect your credit score.

3. Consider a cosigner

A cosigner is an individual who agrees to take joint responsibility for the repayment of a loan alongside the primary borrower. When someone cosigns a loan, they are essentially offering a guarantee to the lender that if the primary borrower fails to make the required loan payments, the cosigner will step in and fulfill those obligations. 

Getting a cosigner can be a good idea if your creditworthiness, income, credit score, or financial history don’t qualify you for a lower rate. When you apply for a personal loan with a cosigner, the lender considers the cosigner’s creditworthiness and financial stability in addition to your own. So, if you have a bad credit score but you cosign a loan with someone who has an excellent credit score, lenders will be much more likely to offer you a competitive rate because of the reduced risk associated with the loan. 

4. Look for a lender with an alternative credit check

When looking for lower interest rates, it’s worth exploring lenders that offer alternative eligibility checks. Traditional lenders, such as banks and credit unions, primarily rely on your credit history when assessing your ability to repay a loan. However, some alternative lenders consider factors beyond your traditional credit score. These may include:

  • Your income stability and employment history.

  • Bank statements, which can provide insights into your financial behavior.

  • Payment history for non-credit accounts, such as rent, utilities, or subscriptions.

  • Your assets, such as savings accounts or investments. 

  • Your debt-to-income ratio, i.e., the percentage of your income that you put towards debt repayment each month.

5. Wait for national rates to fall

If you take out a personal loan while national interest rates are high, you’ll end up paying more money in interest charges. You may be able to avoid this by delaying your personal loan application until national interest rates have decreased. This can both save you money over the life of the loan and make your monthly payments more affordable in the short term. 

However, predicting interest rate hikes or dips can be complex. Your personal financial situation will also play a role in your timing. So, while it can be helpful to wait for rates to fall, make sure it doesn’t come at the expense of your immediate needs and plans. 

Alternatives to a personal loan 

While personal loans are a popular and versatile option for getting your hands on some extra cash, they’re not the only route available. Here are some alternatives to consider. 

Credit cards

Credit cards may offer more flexibility and convenience than a personal loan. If you’re confident in your ability to repay your debt quickly and can secure a credit card with a low introductory interest rate, you may be able to put your near-term purchase on a card without having to worry about high personal loan interest rates. Just make sure you pay off the balance before the introductory period expires. Otherwise, you could face even higher interest charges than you’d get with a personal loan. 

Home equity loan or home equity line of credit

Home equity loans, sometimes called second mortgages, provide homeowners with quick access to a lump sum of money that they can then repay with interest. Home equity loans typically come with fixed rates. These loans are most useful for one-time expenses, like a home renovation or debt consolidation. 

You may also want to consider a home equity line of credit (HELOC), which is a revolving line of credit (similar to a credit card) with a variable interest rate. A variable interest rate is a type of interest rate that is not fixed over the life of a loan. Instead, it can change periodically, typically in response to fluctuations in a specified benchmark interest rate. 

Home equity loans and lines of credit often come with lower interest rates than most personal loans. That’s because they are secured by your home’s equity. As another bonus, this interest may also be tax-deductible, depending on the purpose of the loan and your local tax laws. In contrast, personal loan interest payments are rarely tax deductible. Just keep in mind that, like a home equity loan, the lender can seize your home if you fail to repay a HELOC. 

Peer-to-peer lending

Peer-to-peer (P2P) lending involves borrowing from individuals or groups of individuals rather than traditional financial institutions like banks. Borrowers typically use online P2P lending platforms. Here, they can select from a variety of repayment terms and schedules, making it easier to find a loan that suits their specific needs. 

Cash-out refinance

A cash-out refinance is a popular type of mortgage refinancing option. It allows you to replace your existing mortgage with a new one that has a higher principal balance. You then receive the difference between the new mortgage balance and the old mortgage balance in cash. Since the average interest rates for mortgages are often lower than personal loan rates, homeowners can use this option to reduce their overall borrowing costs. 

Compare personal loan rates on Navient Marketplace

A personal loan marketplace1 can help you make sure you’re getting the best loan for your needs. To streamline the process, Navient Marketplace offers a one-stop shop where borrowers can compare lenders,  get personalized loan rates, and access cash quickly and easily. Explore your loan options by visiting our marketplace today.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Navient customers are invited to consider personal loan offers through our partner Fiona. Navient has not shared your information with Fiona and is not involved in the personal loan application process in any manner. All information is submitted directly to Fiona and any personal loan offers are made directly by participants in Fiona’s lending platform, powered by Even Financial. Even Financial, Inc. is the industry-leading embedded financial marketplace and independent subsidiary of MoneyLion Inc. (“MoneyLion”) (NYSE:ML). Checking your rate will not affect your credit score. Eligibility is not guaranteed and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. 

Loan proceeds may not be used for postsecondary educational expenses, including refinancing federal or private student loans.

Get matched with a personal loan offer in 60 seconds or less.

Get Connected

Stay up to date on the latest offers in the Marketplace by Navient!

By submitting this form, you agree to receive emails from Navient and its subsidiaries.