Oluwatobi- Personal loans remain a great financial solution to both expected and unforeseen expenses.
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Good APR for a personal loan is important as personal loans don’t usually limit what the borrower can use the borrowed funds for, personal loans have remained a smart financial solution to one’s financial needs.
Whether you need to pay medical bills or student debts or even to consolidate your debts, personal loans will always come through as long as you meet lenders’ requirements.
However, you should not just eagerly accept the first offer that you get, instead, you should conduct careful research by contacting different lenders so you can get multiple offers and make comparisons. Doing this will help you choose the loan with the best terms.
One of the ways to successfully compare offers and pick the best is to look at the Annual Percentage Rate (APR) that is attached to each and pick the one with the lowest APR.
The APR usually includes the interest rate on the loan combined with certain fees that the lender will charge.
Now that you have this information, let’s take a look at some Top Indicators of a Good APR for a Personal Loan, so that the next time you are applying for a personal loan, you will know what to look for.
What Is an APR?
The Annual Percentage Rate (APR) is a combination of the interest rate on a personal loan and some fees such as origination fee and application fee, which are charged on the loan. It is calculated on a yearly basis and expressed as a percentage.
It is usually used to determine what the total cost of a loan will be and how much the borrower will have to pay every month.
It applies to every type of loan including personal loans, auto loans, mortgages, and credit cards.
While searching for a good personal loan, the APR can be used to make comparisons between offers so you can pick the one that will cost you the least.
However, if the lender doesn’t charge any fee on the loan, then your interest rate is also your APR.
It is also important to note that there are some factors that determine what the APR on your loan will be, and one of them is the status of your credit score. A good credit score will help lower your APR and vice versa.
What are Personal Loans?
These are a type of installment loan that is taken for a variety of purposes. Unlike some types of loans that lenders grant for a particular purpose, personal loans can be used for any project that the borrower wants. You can use them for debt consolidation, medical bills, or to pay off student debts.
Personal loans can either be secured or unsecured, meaning some lenders require collateral while others don’t.
Difference Between APR And Interest Rate On A Personal Loan?
Although APR and interest rate are two terms that are sometimes used reciprocally, they are both dissimilar.
An interest rate is the amount that a lender charges on top of the amount that is granted to a borrower (principal). This amount is usually generally expressed as a percentage of the principal.
The APR, on the other hand, is a consolidation of the interest rate, along with other fees, such as administrative fees, origination fees, or application fees.
A simple way to explain the relationship between an APR and an interest rate is that when a lender charges certain fees on the loan, the APR is higher than the interest rate while the amount is usually the same as the interest rate if the lender doesn’t charge any fee.
It is however important to note that “no fee” loans are rare.
Factors That Affect APR on a Personal Loan
The APR on your personal loan is the totality of your interest rate combined with certain fees charged by the lender. Factors that determine your interest rate will also determine your APR. On that note, here are certain factors that will affect your APR:
1. Credit Score: Naturally, a high credit score guarantees you a loan with a favorable interest rate which then translates to a great APR on your personal loan. So, if you want a good APR on your personal loan, work on improving your credit score.
2. Employment: The type of job you have will determine the interest rate and APR on your personal loan. If you have a stable full-time job, you are set.
3. Debt-to-Income Ratio: This has to do with the portion of your earnings that go towards settling debts every month. A low DTI is guaranteed to get you a great APR.
4. Loan Size: The size of the personal loan you are applying for will also affect your APR. A larger loan size will attract bigger APRs because it puts the lender’s money at a higher risk compared to a small loan size.
5. Income: This factor also has to do with the risk being incurred by the lender. Lenders would typically lower your APR if you are making a lot of money, as this puts their money at less risk.
6. Loan term: The longer the duration of the loan, the higher your APR.
7. Collateral: If the loan is secured, that is, if it is backed by collateral, you are bound to get a nice interest rate which would lead to a great APR.
8. Application fee: This is the amount that lenders charge you when you borrow a loan. The amount charged varies by lender so this will ultimately affect the APR charged.
9. Origination fees: This is a fee charged when a borrower’s loan is approved and they receive the money. This amount will also affect your APR.
How to get the Lowest APR on Your Personal Loan
The APR charged on loans usually varies by lender but there are certain factors that most of them take into consideration when deciding on the amount of APR they should charge on your personal loan.
They include the duration of the loan, the loan amount, and your reason for taking the loan. To better your chances of getting a personal loan with low APR, here are some tips:
1. Go for a smaller loan: Since you pose less risk as an applicant borrowing a small loan size, lenders are more likely to charge you a low APR.
2. Pick a loan with a few number of fees: Not all lenders charge numerous fees on loans, some don’t even charge at all. If you can get a loan from such lenders, your loan should come with a minimal APR.
3. Borrow for a productive reason: If you get a loan for a productive reason like to settle your student debt or to improve your home, lenders tend to charge lesser APR compared to when you borrow to go on a vacation.
4. Get a loan with a shorter duration: The APRs charged on short-term personal loans tend to be lower than the ones on long-term personal loans.
5. Have a great credit score, a low DTI ratio, and a steady source of income: These three factors will also help you get a lower APR.
How Is The APR For A Personal Loan Calculated?
To calculate the APR on a personal loan, there are some pieces of information that you need to have. They include:
- Loan amount.
- Fees (origination fee, application fee, e.t.c).
- Interest rate.
- Loan duration.
- Monthly payment amount.
Now that you know the information that you require to calculate your loan fee, here are a few steps to help you do so:
1. Sum up the interest rate and fees charged on the loan.
2. Divide the result by principal amount.
3. Next, divide whatever you get by the number of days in your loan’s term.
4. Multiply the result by the number of days in a year, which is usually 365.
5. Lastly, multiply that figure by 100 to convert that number into a percentage.
Factors to Consider When Comparing Personal Loan Costs
When trying to get a personal loan, it is important to get offers from multiple lenders so you can compare and pick the one that will cost you the least.
While the APR on the loan can give you an idea of what the total cost of the loan will be, there are other factors that should also be considered when comparing offers from lenders. They include:
1. The duration of the loan: The term length of a loan will not only influence your the APR on the loan, it will also dictate your monthly payment. While a loan with a long term will lower your monthly payments, it will also generate more interest over the life of the loan.
2. Fees: Besides the application fee and origination fee that are added to your interest to determine your APR, there are some other fees that may come up unannounced such as late fees and prepayment penalties. These may impact the total cost of the loan so you need to watch out for them.
Top Indicators of a Good APR for a Personal Loan
1. An APR that is below 11% on a personal loan is usually considered a good APR. It could potentially save you a lot of money over the life of a loan.
However, to be eligible for a good APR, you will need a credit score of at least 670 and a steady source of income.
If you don’t meet all the above requirements, you can also get a co-signer who does.
2. Although it is extremely rare, another indicator is a personal loan lender that doesn’t charge any of the fees that are often added to the interest rate to decide your APR.
Average Personal Loan Rates by Online Lenders
Below are some lenders of personal loans and the amount that they charge as APR:
SoFi
- APR: 8.99% to 25.81%
- Loan amount: $5,000 to $100,000
- Minimum Credit Score: 680
Upstart
- APR: 5.2% to 35.99%
- Loan amount: $1,000 to $50,000
- Minimum Credit Score: 300
Happy Money
- APR: 11.52% to 24.81%
- Loan amount: $5,000 to $40,000
- Minimum Credit Score: 640
Upgrade
- APR: 8.49% to 35.99%
- Loan amount: $1,000 to $50,000
- Minimum Credit Score: 600
Best Egg
- APR: 8.99% to 35.99%
- Loan amount: $2,000 to $50,000
- Minimum Credit Score: 640
To summarize:
Personal loans are no doubt a great financial solution to financial needs. However, it is important that you pick one with a favorable APR, as this will show you the total cost of the loan and prepare your mind for what you will have to pay in service of the loan debt.
Ensure to digest and make use of all that has been discussed about APR and the Top Indicators of a Good APR for a Personal Loan
Oluwatobi
