Many different institutions offer personal loans to borrowers with a wide variety of financial backgrounds. It’s possible to get competitive rates on personal loans from many banks, credit unions, and even online lenders. To find the lowest rates, the best strategy is to comparison shop and not stick to a single bank. Compare and contrast the interest rates offered by different lenders to find the lowest possible with your credit profile.
It’s widely accepted that borrowers with high credit scores will be able to secure the lowest interest rates on most lending products. Why is it that a customer’s credit score is so important when applying to borrow money? An individual’s credit score is meant to represent how financially reliable they are using information regarding their current and past credit accounts. Credit scores are calculated using the following formula:
All these details are meant to represent an overarching picture of your creditworthiness. The higher your credit score, the lower the risk for the lender. The lower your credit score, the higher the risk for the lender. When lenders have a higher risk of loss with a credit product, they will increase the interest rates to compensate for that possible loss. Therefore, you will need a good credit score to guarantee the lowest rates on a personal loan.
If you want the lowest rates available for your personal loan, there are several actions you can take to improve your credit score. For those who do not have an established credit history, having a friend or family member add you as an authorized user to an older credit card account could significantly improve the average age of your credit accounts.
Keep up with all your current monthly payments and avoid any late or missed payments. Your payment history has the biggest impact on your credit score, so ensuring all of your payments are on time is key. Next, we recommend that you do what you can to decrease your credit utilization ratio. Most financial experts say that borrowers should keep their credit utilization below 30% for a good credit score.
Check your credit report often so you can watch your credit score increase over time. This will also allow you to catch any errors that you need to dispute before they impact your score too much. Once you reach your goal, you can begin applying for personal loans to get the lowest rates with your new credit score.