5 ways to qualify for a lower personal loan interest rate

A lower rate on a personal loan is a huge financial win, and you could make it happen without drastic changes. Just a few small moves could strengthen your credit and help you save on your next loan.

You’ll learn exactly how to get a lower personal loan interest rate below, in five straightforward steps.

1. Check your credit report for errors and easy fixes

Your credit score, which lenders check when you apply for a loan, is based on the information in your credit report. If your credit report has any errors, they could drag down your credit score. Errors are common, and an investigation by Consumer Reports and WorkMoney found that 44% of consumers who volunteered to check their credit reports found at least one mistake.

You can get your credit report for free online every week at AnnualCreditReport.com. Make sure to request your report from all three credit bureaus: Equifax, Experian, and TransUnion. Each credit bureau issues its own separate credit report, and they may have different information.

Read through your credit reports, and if you spot anything that’s wrong, file a dispute. The credit bureaus all offer online dispute forms. Getting errors taken off your credit report could improve your score and maximize your approval odds for a loan.

2. Pay down revolving balances before you apply

Revolving balances are balances on credit cards and lines of credit, like home equity lines of credit (HELOCs). These balances determine your credit utilization—a term that describes how much of your existing credit you're using. 

For example, let’s say you have a $500 balance on a credit card with a $1,000 limit. Your credit utilization would be:

$500 / $1,000 = 0.50 = 50%

Credit utilization is an important part of your credit score. If you pay down revolving balances, you could lower your utilization, improve your credit score, and potentially secure a lower loan rate.

Revolving debt balances are also part of your debt-to-income (DTI) ratio. Lenders calculate your DTI ratio by dividing your combined monthly debt payments (including housing) by your pre-tax monthly income. Your DTI affects whether you’re approved for a loan and the interest rate you get.

3. Keep steady income and avoid new credit checks

Lenders like financial stability from applicants. Two of the main factors they look at here are your income and any recent credit applications.

When you have steady income, lenders tend to consider you less of a risk as a loan applicant. A consistent paycheck is a sign that you’re less likely to have trouble making your loan payments. Lenders often reward lower-risk applicants with lower interest rates.

Lenders also gauge risk by the recent credit checks on your credit file. When you apply for credit cards or loans, it typically results in a hard credit inquiry. If you haven’t applied to borrow money lately, that could help you secure a lower interest rate. Try to avoid any credit applications for six to 12 months before you apply for a personal loan.

4. Compare lenders before choosing

Personal loan rates and fees differ by lender. You may find that one lender offers you a much lower rate than another. To be sure you’re getting a competitive rate, compare options from at least a few lenders before you apply for a loan.

An easy way to check your loan rates without any impact on your credit score is through prequalification tools. You provide some basic information about yourself and the type of loan you want, and the prequalification tool shows you the rate you could get. It uses a soft credit inquiry that doesn't impact your credit.

5. Build positive payment history over time

Your payment history is often the most important factor for the interest rate you get on a loan. Specifically, lenders usually check your payment history when you’ve borrowed money, meaning on credit cards and loans.

Even if you already have a loan, it still helps to pay on time every month. This can help you build a positive payment history and potentially improve your credit score. After your credit gets better, you could qualify to refinance your personal loan at a lower rate.

If you’re paying off several debts, a good payment history could get you a low rate on a debt consolidation loan. Debt consolidation is a popular strategy to simplify debt payments. It could also boost your credit score, especially if you use a debt consolidation loan to pay off credit card debt. 

What’s next: Keep building your progress

Qualifying for a lower rate on a personal loan is a process, and every positive action you take gets you closer to your goal. If you follow these five steps, you could increase your credit score and show lenders that you’re a low-risk borrower.

Want to find out what kind of rates you could get right now? Prequalify for a personal loan today from Achieve Personal Loans to discover your options.