What Is APR on Personal Loans?

More borrowers than ever are taking out personal loans to fund everything from automobile down payments and home improvement projects to honeymoons.

With many companies offering low APRs and flexible repayment terms, these loans have become increasingly accessible to applicants across a range of credit scores and income brackets.

Despite their accessibility, it’s important for borrowers to understand each aspect of the loan selection process. One of the most relevant elements of a loan is its APR, or annual percentage rate.

APR is determined by the amount of interest that is paid on a loan, mortgage or credit card and is affected by many factors including the borrower’s credit score, credit history, annual income and the length of the repayment term.

In addition to interest rates, APR also comprises any extra fees, which are converted into a percentage based on how much is paid annually. If there are no additional fees on a loan, the APR is simply equivalent to its interest rate.

Why APRs are important for personal loans

For many borrowers, the first thing that they consider when looking for a personal loan is the interest rate. While the interest rate on a loan is an important factor in the decision-making process, interest alone does not define the entire cost of taking out that loan.

That’s where the annual percentage rate comes in. APR provides a holistic calculation of the cost of the loan, taking all fees and interest rates into account. Because it encompasses the most financially relevant aspects of a personal loan, it is one of the most important things to look at when a borrower is making a decision.

In some cases, the loan with the lowest interest rate might not really always be the most cost-effective or cheapest way to borrow. Many loans have a variety of fees that may drive up the actual cost of borrowing.

After all fees are applied, the full cost of the loan beyond the base amount and interest can increase substantially. For example, many loans come with origination fees, or an initial charge for borrowing. In some cases this can come out to up to 6% of the entirety of the loan. In addition, some also require payment processing fees which further drive up the overall cost of the loan.

It can be difficult for a borrower to calculate all of those aspects and make a fully informed decision, so looking at APR can provide a stronger understanding of the actual total cost.

What Lenders Offer Low APRs?

• Lightstream with Autopay (5.34%) – LightStream’s APRs start at 5.34% with autopay, depending on the purpose of the loan. The company offers loans ranging between $5,000 and $100,000 that fund as soon as the same day the loan is approved.

• Best Egg (5.99%) – Best Egg’s APRs start at 5.99%, with personal loans ranging between $2,000 and $35,000.

• SoFi (6.54%) – SoFi’s APRs start at 6.54%, with lower rates for borrowers who choose to use their autopay system. Their personal loans range between $5,000 and $100,000 with repayment terms of two, three, four, five, six and seven years.

» MORE: Shop to Find Personal Loans With The Lowest APR

Average Personal Loan Interest Rates by Credit Score

Your credit score is one of the elements of your loan application that has the biggest impact on your quoted APR. Borrowers with high credit scores are typically eligible for the best rates.

Personal loan APRs can range from 4.99% on the very low end to over 35.0% on the high end.  If you have excellent credit, or a score above 720, you will likely be looking at an APR between 10.3% and 12.5%. In some cases, this figure can drop even lower. Borrowers with good credit, or scores between 680 and 719 will be looking at an average APR between 13.5% and 15.5%. If your credit score is average, meaning that it’s between 640 and 679, you can usually expect a rate between 17.8% and 19.9%.

If you’re a borrower with a credit score below 639, you may have difficulty getting approved for any personal loans. However, if you are approved, you will likely be looking at an APR that is upward of 28.5%.

Your APR depends on many factors

Although your credit score is the biggest defining aspect in a loan company’s APR determination process, there are other elements that can impact the decision. Those include any recent derogatory remarks on your credit report, your debt-to-income ratio, the loan amount and the repayment terms.  

A low debt-to-income ratio indicates that a borrower can better manage monthly payments, so it can help to bring down the overall rate of the loan. Choosing a shorter repayment term can also help lower a loan’s APR. Some companies also take into consideration any marks on an applicant’s credit report indicating any late payments, defaults or collections. Even if the credit score is good and payments have been settled, the marks may still affect the offer.

Your repayment terms affect your costs of borrowing

Although some loan companies offer repayment terms of up to seven years, choosing the most long-term option can significantly increase the APR. However, although a shorter repayment period may come with a lower APR, a borrower must consider the affordability of the higher payments that come with that shorter term. If payments are missed and fees accrue, this could result in a higher overall cost to the loan than if they had chosen the longer repayment term with a higher APR.

Shop Around For the Best Interest Rate

Making a decision can be difficult when there are so many different factors to consider when selecting the personal loan that’s right for you.

With so many companies and lenders out there, borrowers have a myriad of options to choose from. Although companies may offer different perks and benefits to potential borrowers, the most important goal of the decision process is to find the loan with the lowest rates and an overall cost that fits your budget.  

Many lenders allow prospective customers to check their rates with a soft credit check that doesn’t affect credit scores, so it’s easy to obtain multiple quotes and rates. It’s important to compare these different rates before making a final decision.

Make sure to evaluate offers from multiple lenders while finding the personal loan that fits your needs.

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