Mortgage rates are going up — and thanks to Federal Reserve action, so are the rates on credit cards. But the average rate on personal loans is going down, according to Credible.com.
Last week, the average rate for qualified borrowers – those with a credit score of at least 720 – fell by 0.17% to 10.85%. In contrast, the average credit card rate for new accounts was 18.32% last month.
A personal loan is normally used to make a big purchase or consolidate high-interest debts, such as credit cards. The borrower seeks a specific amount of money that is paid back over a specified time period with a fixed monthly payment.
Unlike a mortgage, which can only be used to buy a house, or an auto loan, which can only be used to purchase a vehicle, personal loans can be used to buy a variety of things. That’s why they have become a popular type of loan since they were introduced.
Cheryl Ann of Kalispell, Mont., turned to personal loan lender Best Egg late last year to get out from under high-interest debt.
“With the stress of Christmas and moving into a new home, credit card bills piling up caused spending $800 a month paying just for credit card bills,” Cheryl Ann wrote in a ConsumerAffairs review. Best Egg has taken that stress away with a personal loan. Something I can manage and get rid of my debt. The process was simple.”
Income and good credit are major factors
The rate that lenders charge for a personal loan is determined by several factors, including income. But the borrower’s credit score is a significant factor. The higher the credit score, the lower the interest rate.
For example, Experian says a borrower with “super-prime” credit – a score between 781 and 850 – could get a rate as low as 6.59%. Someone with “deep subprime” credit – a score between 300 and 499 – would pay a rate of 15.3%, which is lower than many credit card rates.
That’s why it pays for borrowers to work on raising their credit scores before applying for a personal loan or any other type of loan. The easiest and most productive step is to pay all bills on time every month. Consumers who reduce their credit card debt, which will increase their amount of available credit, will also see an increase in credit scores.
It’s also a good idea to obtain a copy of your credit report from all three agencies – Experian, Equifax, and TransUnion – and look for incorrect information that could be dragging down your score.