Personal Loans: Types, Rates, and How to Get the Best Deal

Types of Personal Loans

Personal loans come in several varieties, and understanding the differences is essential to choosing the right product for your situation. The two broadest categories are secured and unsecured loans. An unsecured personal loan does not require collateral — the lender relies on your creditworthiness, income, and repayment history to determine whether to approve you and at what rate. Because the lender takes on more risk with unsecured loans, interest rates are generally higher than for secured options. Most personal loans fall into this category.

A secured personal loan requires you to pledge an asset — such as a savings account, certificate of deposit, or vehicle — as collateral. If you default on the loan, the lender can seize the asset to recover their losses. Secured loans typically offer lower interest rates and may be easier to qualify for if your credit is less than perfect, making them a useful option for borrowers who are rebuilding credit or who want to lock in the lowest rate possible.

Beyond the secured-versus-unsecured distinction, personal loans also differ by their interest rate structure. A fixed-rate loan carries the same APR for the entire repayment term, which means your monthly payment never changes. This predictability makes fixed-rate loans the most popular choice, especially for budgeting purposes. A variable-rate loan, by contrast, has an interest rate tied to a benchmark index such as the prime rate. Your rate — and therefore your monthly payment — can rise or fall over time. Variable-rate loans sometimes start with a lower APR than fixed-rate loans, but they carry the risk of increasing costs if rates climb.

Debt consolidation loans are personal loans taken out specifically to combine multiple debts into a single payment, ideally at a lower interest rate. Co-signed loans allow a second person with stronger credit to sign onto the application, which can improve approval odds and secure a better rate for the primary borrower. The table below summarizes the key characteristics of each loan type.

Credit Union Loans vs Bank Loans vs Online Lenders

Where you borrow matters just as much as how much you borrow. The three main sources for personal loans — credit unions, banks, and online lenders — each have distinct advantages, drawbacks, and rate structures that can significantly affect the total cost of your loan.

Credit unions are member-owned, nonprofit financial institutions. Because they do not answer to shareholders seeking profit, credit unions can pass savings on to members in the form of lower interest rates and reduced fees. The National Credit Union Administration reports that average personal loan rates at credit unions are typically 1-3 percentage points lower than at traditional banks. Credit unions also tend to be more flexible with borrowers who have thin credit files or past financial setbacks. The catch is that you must qualify for membership, which usually requires living in a specific geographic area, working for a certain employer, or belonging to a qualifying organization. Some credit unions have broad membership eligibility through association memberships that cost as little as $5-$10 to join.

Banks offer the familiarity and convenience of an institution you may already use for checking and savings accounts. Having an existing relationship with a bank can sometimes get you a small rate discount or faster approval. However, banks are for-profit institutions, and their personal loan rates generally run higher than credit unions. Large national banks tend to have stricter underwriting criteria, often requiring credit scores of 660 or higher for approval. Regional and community banks may be more flexible, but their rates still typically exceed what credit unions offer.

Online lenders have disrupted the personal loan market by offering fast applications, quick funding (sometimes within 24 hours), and competitive rates for well-qualified borrowers. Many online lenders use alternative data and proprietary algorithms for underwriting, which can benefit borrowers with non-traditional credit profiles. However, the convenience comes with trade-offs — interest rates for borrowers with fair or poor credit can be very high (up to 36% APR), and some online lenders charge origination fees of 1-8% that are deducted from your loan proceeds. Always compare the total cost of borrowing, not just the advertised APR.

Average Personal Loan Rates by Credit Score

Your credit score is the single biggest factor determining the interest rate you will pay on a personal loan. Lenders use your score to assess how likely you are to repay the loan on time, and they price their risk accordingly. The difference between an excellent credit score and a poor one can mean paying two to five times more in interest over the life of a loan.

The following table shows typical APR ranges by credit tier based on data from major lenders in early 2026. Keep in mind that individual lender rates vary, and factors like income, employment stability, and debt-to-income ratio also influence the rate you are offered.

As the table illustrates, a borrower with excellent credit taking out a $10,000 loan for three years could pay as little as $304 per month, while a borrower with poor credit might pay $461 per month — over $150 more for the exact same loan amount. Over the full 36-month term, the borrower with poor credit would pay roughly $4,900 more in total interest than the borrower with excellent credit. This is why improving your credit score before applying for a personal loan can result in substantial savings.

If your score is in the fair or poor range, consider waiting three to six months to apply while you work on improving your credit. Paying down existing debt, making all payments on time, and disputing any errors on your credit report can move your score into a higher tier and unlock significantly better rates.

How to Qualify for a Personal Loan

Qualifying for a personal loan involves meeting several criteria that lenders evaluate to determine your ability and willingness to repay the debt. Understanding these requirements before you apply allows you to strengthen your application and improve your chances of approval at a favorable rate.

Credit score is the first factor most lenders assess. While minimum requirements vary by lender, a score of 670 or above puts you in a strong position for competitive rates. Some online lenders and credit unions will work with borrowers scoring 550 or lower, though rates will be significantly higher. Before applying, check your score through your bank's app or a free service like Credit Karma so you know where you stand.

Income and employment verification confirms that you have the financial means to make your monthly payments. Most lenders require a minimum annual income — often $20,000 to $25,000 — and stable employment history. You will typically need to provide recent pay stubs, W-2 forms, or tax returns. Self-employed borrowers may need to supply two years of tax returns and profit-and-loss statements.

Debt-to-income ratio (DTI) measures your total monthly debt payments divided by your gross monthly income. Most lenders prefer a DTI of 40% or less, and some set their cutoff at 36%. For example, if you earn $5,000 per month and your existing debt payments total $1,500, your DTI is 30% — well within most lenders' comfort zone. A high DTI signals that you may struggle to take on additional debt, even if your credit score is strong.

Documentation you should have ready when applying includes government-issued photo ID, proof of address (utility bill or lease), Social Security number, bank statements from the past two to three months, and proof of income. Having these documents organized before you start the application process prevents delays and ensures a smoother experience. Some lenders also ask for a letter explaining the purpose of the loan, particularly for larger amounts.

Debt Consolidation with Personal Loans

Debt consolidation is one of the most common and financially sound reasons to take out a personal loan. The concept is straightforward: you use a single personal loan to pay off multiple existing debts — typically credit cards, medical bills, or other high-interest obligations — and then make one fixed monthly payment on the new loan at a lower interest rate.

When consolidation makes sense: The math works in your favor when the personal loan APR is meaningfully lower than the average interest rate on your existing debts. If you are carrying balances on credit cards charging 20-28% APR and you qualify for a personal loan at 10-14%, consolidation can save you thousands in interest and help you become debt-free on a clear timeline. It also simplifies your finances — instead of tracking four or five different payments with different due dates, you have one payment to manage each month.

How the process works: Once approved for a consolidation loan, you use the proceeds to pay off your existing debts in full. Some lenders will send payments directly to your creditors on your behalf, which helps ensure the old debts are actually paid off. From that point forward, you make a single fixed monthly payment on the personal loan until it is paid in full — typically over two to five years.

Potential savings: Consider a borrower with $15,000 in credit card debt at an average APR of 22%. The minimum payments alone would take over 15 years to pay off and cost more than $18,000 in interest. A $15,000 personal loan at 11% APR with a 4-year term would result in monthly payments of about $388 and total interest of roughly $3,600 — saving nearly $14,400 compared to paying minimums on the credit cards.

Risks to watch for: Consolidation only works if you address the spending habits that created the original debt. If you pay off your credit cards with a personal loan and then run the cards back up, you end up with more debt than you started with. Cut up the cards or lock them away, and commit to living within your means while you pay down the consolidation loan. Also watch for origination fees — a 3-6% fee on a large loan can offset some of your interest savings, so factor it into your comparison.

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How Refinancing Works

Refinancing a personal loan means taking out a new loan to replace your existing one, ideally on better terms. The most common reasons to refinance are to secure a lower interest rate, reduce your monthly payment, or change the repayment timeline. Refinancing makes the most sense when your credit score has improved significantly since you took out the original loan, when market interest rates have dropped, or when your financial situation has changed and you need different repayment terms.

The refinancing process is similar to applying for a new personal loan. You shop around for rates, submit an application with your preferred lender, and — if approved — use the new loan proceeds to pay off the remaining balance on the old loan. From that point, you make payments on the new loan only. Most lenders allow you to prequalify with a soft credit check, which lets you compare offers without affecting your credit score.

Benefits of refinancing can be substantial. For example, if you originally borrowed $20,000 at 18% APR and your credit has improved enough to qualify for 10% APR, refinancing the remaining balance could save you hundreds or even thousands of dollars in interest over the remaining term. Extending the loan term can lower your monthly payment, while shortening it helps you become debt-free sooner and pay less total interest.

Costs to consider include origination fees on the new loan (typically 1-6% of the loan amount), any prepayment penalties on the original loan, and the potential impact of a hard credit inquiry on your credit score. Run the numbers carefully — if the fees eat up most of your interest savings, refinancing may not be worth the hassle. A good rule of thumb is that refinancing should save you at least 1-2 percentage points on your APR after accounting for all fees.

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