Why your personal loan rate might be higher than you expected

In many situations, personal loans can be powerful financial tools. They can be used for expenses like car repairs, home improvements, and debt consolidation, helping you solve problems and reach financial goals. 

Many lenders offer personal loans, too, so you could have a lot of different options. While options can be good for comparison shopping, there's one thing personal loan lenders tend to have in common: They advertise the lowest possible interest rate—rather than the most commonly offered one. 

Only a fraction of applicants will actually qualify for the lowest advertised rate. Everyone else is left wondering, Why is my personal loan interest rate high?

If you're one of them, you're definitely not alone. And that may not be the only reason your rate isn't as low as you expected. Let’s look into why that could be the case and how you can use this chance to get even lower rates in the future. 

Why rates vary (and which factors have nothing to do with you)

Lenders charge interest because that's how they make money on loans. Not every loan carries the same costs for the lender, however. 

Some loans are more expensive for lenders because they have a higher risk of not being paid back. When a borrower stops making payments, the lender can try to collect—but it may end up writing off the loan. In that case, the lender has to eat the loss.

One way lenders help to offset high-risk loans is by charging higher interest rates. A higher rate means the lender makes a bit more money on the loan each month, which could help balance the loss if the borrower stops making payments before the loan is paid off. 

Lenders look at a lot of factors to calculate how risky a loan might be to approve. That risk level goes into calculating how much they should charge. A lot of these factors involve you and your ability to repay the loan:

• Income. Lenders like to see a stable, steady, and sufficient income. You’ll often get a lower interest rate if you have reliable income.

• Debt level. Lenders want to know about your other debt because it could impact your ability to repay another new loan. In a lender’s eyes, the less overall debt you have, the better. 

• Credit history. Your credit score matters, but so does your credit report. Lenders will check to find out how often you miss payments and your current debt situation. 

• Co-signer or collateral. Some lenders allow you to add a co-signer to your loan, which could help improve your loan rate. Sometimes you can use collateral, or something of value like a savings account, to boost your odds of getting a better personal loan rate. 

• Loan size. Bigger loans take more work to repay, and there’s more on the line if you default. That’s why lenders generally increase personal loan rates if you borrow more.  

• Term length. Longer-term loans are often riskier because there’s simply more time for something to go wrong during repayment, like if you get laid off or get sick.

Other factors that can cause rates to vary

Sometimes it’s not you. Your personal loan interest rate could be higher than expected because of things that you have no control over. Here are two common ones:

• Economic changes. Most lenders base their rates on rates set by the Federal Reserve. If the Fed raises interest rates, as it does sometimes when inflation is high, lenders often bump up personal loan rates, too.

• Lender policies. Some lenders simply set higher bars for their borrowers than others and charge rates accordingly. Some lenders also specialize in bad credit loans and might charge higher rates overall. 

What you can control next time

Your rate on a loan is determined by your financial situation at the time you apply. That means you're not stuck with high-rate loans forever. There’s a lot you could do to improve your ability to qualify for a lower rate the next time you need to borrow money:

• Compare lenders. Comparison shopping isn't just for goods; you can often find a better loan rate if you shop for a personal loan with a few different lenders. Check online banks as well as local banks and credit unions.

• Build your credit score. Your credit is a huge factor in your loan rate, so any improvements here could pay off big on your next loan. It's always a good time to work on growing your credit score.

• Save up an emergency fund. If you have a stash of money ready to go when an emergency crops up, you'll have more options for dealing with financial issues. That means that when you do borrow money, it’s more likely to be on your terms. 

• Increase your income. If you’re able, think about ways to increase your take-home pay, like switching jobs or starting a side hustle. This could help your finances overall, not just your ability to get a loan. 

Already took out the loan? Here’s how to make it work for you

If your current personal loan interest rate is high, it’s true you’ll pay more over time for the loan. Here’s what’s also true: you can still use this as an opportunity to better your overall financial picture.Here’s how to help that happen:

• Stick to a budget. Lots of budgeting styles are out there. Find one that works for your personal style so it’ll be easier to stay on top of your debt. 

• Set up autopay. An on-time payment history is the foundation of good credit. One way you could avoid missing payments is to put all of your bills—including your personal loan—on autopay.

• Pay extra when you can. You could pay less interest over time if you make extra payments on your debt—plus you could get rid of it sooner, too. Consider putting extra windfalls toward your debt, or even adding a little bit to your monthly payment. 

• Refinance your loan. If you've made some credit improvements and you’re able to qualify for a lower rate, it might be a good idea to take out a new personal loan to pay off your old one. Make sure you consider any extra fees for the new loan, though. 

Wrap-up: Your rate today isn’t your forever rate

No one starts out by getting the very best personal loan rates. So if your personal loan interest rate is too high, don’t think of it as a strike against you. Instead, think of each on-time monthly payment you make as another chance to boost your credit score and improve your loan rates in the future.