Personal loans are a popular borrowing option due to their flexibility. As with all loans, though, you pay for the privilege of borrowing money. You’ll be charged interest, and your lender will tell you your rate upfront when you take out your loan.
If you have a fixed-rate personal loan, your interest rate will not change during the entire repayment period. The higher it is, the more your loan will cost to pay back over time and the more money will need to come out of your checking account to make payments each month.
If you’ve borrowed and currently have a personal loan, you may be wondering if your rate is a good one or how it compares with the average. Here’s what you need to know.
Here’s the average interest rate on a personal loan
According to the Federal Reserve, the average interest rate for personal loans as of May 2023 was 11.48%.
This is up considerably from a recent record low of 8.73%, which was the average rate in May 2022. However, it’s still affordable by historical terms. Loan rates generally trended above 12% for decades prior to the 2008 financial crisis.
How does your rate compare to the average?
Since this is an average rate, many people will have rates above it while others will have rates below it. If your rate is below average, it may be because:
- You have good credit and you qualified for more favorable rates as a result.
- You took out a loan at a more opportune time when rates were lower.
- You had a qualified cosigner who agreed to share responsibility for the loan, helping you get a better rate.
- You otherwise had solid financial credentials and presented less risk to the lender than the average borrower, perhaps because you didn’t borrow much or chose a shorter payoff timeline.
If your rate is higher than average, on the other hand, it may be because:
- You presented more risk to the lender than the average borrower, perhaps because of a low credit score, large loan amount, or long payoff timeline.
- You borrowed at a bad time and are stuck with a high rate.
- You chose a bad lender that offered you a bad deal.
The specific reason why your rate is higher or lower will vary depending on your situation. The important thing, though, is to understand what your options are now.
What can you do if your rate is above average?
If your rate is above the average rate for personal loans today, you may want to consider whether it’s worth refinancing. This would involve getting a new loan at a lower rate, using the proceeds to pay back your current lender, and then making payments on the new loan.
Refinancing could potentially save you money each month and over time, depending on how it changes your loan term. Say, for example, you currently owe $10,000 at a rate of 15% and you have five years left to repay your loan. If you refinanced to a new loan at 11.5%, which is right around the current national average, and you chose a new loan that also had a five-year repayment term, you could drop your monthly payment by $18 a month and save a total of $1,078 in interest over the life of the loan.
You should consider looking into refinancing if your rate is high and there’s reason to believe you could get a lower one — perhaps because you borrowed at a bad time in the past, you’ve improved your credit, or you now have a cosigner and can qualify for a better rate because of it.
You can typically apply online with lenders to see what rates and terms you’d be offered to refinance, so you can see if moving forward with getting a new loan to bring your rate down makes sense for you.
If you’ve found that your rate is above average, think about whether you can change it so you don’t spend years paying more than your peers for your personal loan.