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. If you're taking out a debt consolidation loan, saving on interest is key to saving money on your debt payoff.

Let's consider what shapes the rate you're offered. Then look at five straightforward steps to lower it.

What affects your personal loan interest rate

Your rate isn't random, and once you know what lenders weigh, you can figure out where you have room to improve. A handful of factors do most of the work:

• Your credit. Lenders look at your credit scores and history most heavily, and higher scores generally earn lower rates. For a rough yardstick, fair credit typically means a FICO Score of 580 to 669, and good credit generally starts around 670, though each lender sets its own limits.

• Your income and existing debt. Steady income and a lower debt-to-income (DTI) ratio often signal that you can handle another payment. Your DTI compares your monthly debt payments, including housing, to your pre-tax income. Lenders typically set DTI cutoffs between 36% and 43%.

• Your loan amount and term. A shorter repayment term usually comes with a lower rate but a higher monthly payment. Borrow only what you need, and pick the shortest term you can comfortably afford.

• Your rate type. Personal loans typically have fixed interest rates. A fixed rate means your rate and monthly payment stay the same for the life of the loan, so your budget stays predictable. A variable rate, on the other hand, can rise or fall to match changes in a benchmark rate.

Even a small difference in your rate adds up over the life of the loan. On a hypothetical $10,000 loan, trimming your rate by a single point could save you a few hundred dollars in interest before you're done paying it off. That's real money back in your pocket for a bit of homework upfront.

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, which is the percentage of your available credit limit you use at any given time.

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 the second-most important part of your FICO 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.

You can prequalify with Achieve Personal Loans to check your estimated rates. From there, compare what you find against a few other lenders so you know you're getting a competitive offer.

A couple of moves on your end could push your rate down even further:

• Ask about rate discounts and stack them if you can. Achieve Personal Loans offers discounts for steps like adding a co-borrower, paying your creditors directly, or verifying retirement assets, and each one could trim your rate a little more.

• Add a co-signer or co-borrower with strong credit. A co-signer guarantees a loan but doesn't share the money, while a co-borrower shares both the loan and the funds. Either one could help you qualify for a lower rate if the person you tap has solid credit, since the lender also considers their scores when you apply. Find out how to get a personal loan with a co-signer.

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.

Achieve is not a Credit Repair Organization and does not provide credit repair services.

Not all applicants will qualify for interest rate savings. Offered interest rate savings are not guaranteed, will vary based on several factors, and are subject to credit approval and other conditions. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to pay off qualifying existing debt directly; and/or showing proof of qualifying retirement savings, could help some customers qualify for lower rates. To be considered for any savings option, customers must apply for and submit a new Achieve personal loan application, meet one or up to all three of the savings options, and meet our underwriting criteria. Any savings will be reflected in the offer and will fall within our standard range of rates. Applicants with excellent credit who qualify for the lowest rate may not be eligible for additional interest rate savings.