By Nicole Dow | NerdWallet
Interest rates on personal loans have steadily increased since early 2022, coinciding with the Federal Reserve’s efforts to curb inflation by raising the federal funds rate.
But anticipated Fed rate cuts before the end of this year may not bring personal loan rates down right away.
“Typically, we don’t see personal loan rates drop as a result of those rates dropping,” said Jean Hopkins, director of consumer lending at WeStreet Credit Union in Tulsa, Oklahoma.
Changes to the federal funds rate have a greater impact on variable-rate credit products, such as credit cards or home equity lines of credit, she said. Personal loan rates, on the other hand, are driven by larger economic factors, such as inflation and unemployment.
Your exact personal loan rate is most influenced by your creditworthiness and income. If you’re planning to borrow this year, here are a few things you can do to get a low rate on a personal loan.
Maintain a high credit score
Lenders rely heavily on credit scores to determine how likely an applicant is to repay a loan. Generally, those with high scores get the lowest rates.
“If you have a high credit score, banks think that you’re a good risk to take,” says Spencer Betts, certified financial planner at Massachusetts-based Bickling Financial Services.
He says borrowers should check their credit report before applying for a personal loan and take note of any past-due credit accounts or accounts you don’t recognize, which could indicate identity theft.
You can access free weekly credit reports at AnnualCreditReport.com.
Potential borrowers looking to maintain or boost their credit scores should make on-time payments toward credit cards and other loans, Hopkins says, because payment history is the most important factor in your credit score calculation. She also says borrowers should maintain a low credit utilization, which is the percentage of available credit you’ve used on revolving accounts like credit cards.
“Make sure if you’re borrowing money on credit cards that you’re not borrowing more than, say, 30% or 40% of your balance on that line of credit,” she says.
Keep a low debt-to-income ratio
Another factor lenders consider when underwriting a personal loan is the percentage of your monthly income that goes toward debt payments.
“You want to make sure your debt-to-income ratio is low,” says Jen Hemphill, a Kansas-based accredited financial counselor and host of the Her Dinero Matters podcast. “The lower it is, you’re going to have a better chance of a lower interest rate.”
Debt-to-income ratio, or DTI, is calculated by dividing your total monthly debt payments by your monthly income. Multiply that figure by 100 to get the ratio expressed as a percentage. Hemphill suggests keeping your DTI around 30% or less, though some lenders will accept higher ratios.
If your DTI is high, consider paying down debt before applying for a personal loan for a chance at a better rate.
Hopkins suggests paying off smaller debts first to quickly eliminate those monthly payments and consequently lower your DTI.
Raising your income — which would also lower …read more
Source:: The Mercury News – Entertainment
