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Average Cost of a Personal Loan: Understanding Key Factors and Expenses

Benjamin Knox | Last updated Friday, July 14th, 2023

Understanding the average cost of a personal loan is crucial when considering borrowing options. By researching, comparing offers, and actively managing the loan, individuals can make informed financial decisions and minimize their costs.

In recent times, personal loans have emerged as a sought-after financial option among individuals with diverse funding needs. Whether it's to consolidate debt, cover unexpected expenses, or finance a major purchase, personal loans provide a convenient solution.

In this article, we will delve into the average cost of a personal loan and explore factors that influence these costs.

How Much Do Personal Loans Cost?

The overall expense of a personal loan relies on its specific conditions. Personal loans that offer adaptable repayment terms and lower interest rates compared to credit cards have gained popularity due to these advantages.

Although obtaining a personal loan has become more convenient and swift, particularly for individuals with a strong credit score and stable income, they entail expenses similar to other credit products. These costs encompass various factors, such as the APR and undisclosed fees.

In the following sections, we will outline and elucidate the typical fees associated with personal loans, shedding light on their potential financial implications.

Typical fees related to personal loans include:

  • Interest charges
  • Origination fees
  • Late payment penalties
  • Early repayment penalties

1. Personal Loan Interest Rates & APR

The APR, also known as the annual percentage rate, signifies the monthly cost associated with borrowing funds. Although it is expressed on an annual basis, the interest is distributed into smaller increments and added to your principal payment each month as you repay the loan.

There are two main categories of APRs:

  • Fixed-rate APR: By opting for a fixed-rate APR, you can secure a consistent interest rate for the entire duration of your loan. This ensures that your monthly payments remain unchanged, making it easier to plan your budget effectively.
  • Variable-rate APR: Unlike the fixed-rate APR, the variable-rate APR fluctuates based on the prime rate set by the Federal Reserve. Throughout the lifespan of your loan, the interest rate can rise or fall, leading to adjustments in your monthly payments.

The majority of personal loans offer fixed-rate APRs, ensuring consistent monthly payments throughout the loan's duration. However, there are instances where you can opt for a variable-rate personal loan, which means your monthly payments may fluctuate depending on interest rate changes.

Based on the Federal Reserve's latest data, the average APR for personal loans stands at 9.34%. Nonetheless, for individuals with a low credit score, interest rates can skyrocket to as much as 32%.

Determining the actual cost associated with an interest rate depends on the duration it takes to repay the loan. To simplify the complex calculations, we suggest utilizing an interest calculator.

Personal Loan Interest Rates By Lender

The costs of personal loans can significantly differ depending on the specific lender you choose. To offer a comprehensive overview, we have gathered interest rates from the largest lenders in the nation.

LenderTypical APR RangeLoan Amounts
Barclays5.74% - 20.99%$5,000 - $35,000
Citibank7.99% - 17.99%$2,000 - $50,000
PNC Bank5.99% - 25.44%$1,000 - $35,000
Wells Fargo7.49% - 24.49%$3,000 - $100,000
LenderTypical APR Range
Laurel Road8.01% - 16.30% (with autopay)
LightStream3.99% - 16.99% (with autopay)
Marcus5.99% - 28.99%
Sofi5.74% - 16.99% (with autopay)

Personal Loan Rates By State

Are you in search of a loan and wish to avoid being taken advantage of or paying excessive fees? A great starting point is to examine your state's Usury Limit, which establishes the highest permissible interest rate that lenders can impose on borrowers.

StateMaximum Loan Rate
Arkansas5% above current Federal Revenue Discount Rate (FRDR)
Californiaconsumer loans 10% /non-consumer loans 5% above the FRBSF Discount Rate
Coloradoconsumer loans 12% /non-consumer loans 12%
Delaware5% above current Federal Revenue Discount Rate
Floridaloans < $500,000 18% /loans > $500,000 25%
Georgialoans <$3,000 16%loans $3,000-$250,000 5%/month (must use simple interest)
Hawaiipersonal loans 10%
Idahopersonal loans 12%
Illinoispersonal loans 9%
Indianaloans <$50,000 21%
IowaIowa Superintendent of Banking determines Iowa monthly max rate
Kentuckyloans < 15,000 is the lesser between 19% or 4% above current FRDR
MaineNo limit
Mississippigreater of 10% and 5% of current FRDR
Missourigreater of 10% and 3% above the long term United States government bond yield
Montanagreater of 15% and 6% above the Wall Street Journal Prime Rate
Nevadano limit
New Hampshireno limit
New Jersey16%
New MexicoNo limit for written loan agreement
New York16%
North Carolinaloans <$25,000 is greater of 16% and 6% above 6 Month US Treasury Bills
North Dakotaconsumer loans/personal loans 5.5% above the 6 Month US Treasury Bills
Ohioloans < $100,000 is 8%
Oregonloans < $50,000 is the greater of 12% and 5% above the FRDR at the time the loan is made
Pennsylvaniaunsecured loans < $50,000 is 12% / loans > $50,000 is 36%
Rhode Island21% or 9% above the Wall Street Journal Prime Rate
South CarolinaNo Limit
South Dakota18%
Tennesseelesser of 24% and 4% above the Bank Prime Rate
Utahno limit
Washingtongreater of 12% and 4% above the 26 Week Treasury Bill
West Virginia8%

2. Personal Loan Origination Fee

When obtaining a loan, an origination fee acts as an upfront cost deducted by your lender to cover administrative and processing expenses. Typically, major lenders impose a fee ranging from 1% to 5%, although it can also be a fixed amount.

For instance, if you borrowed $20,000 with a 5% origination fee, you would only receive $19,000 upon loan disbursement. The lender retains $1,000 upfront, and you are still obligated to repay the full $20,000, along with interest.

Whenever possible, it is advisable to avoid origination fees. A credit score within the good to excellent range enhances your eligibility for loans that do not impose origination or administration fees.

3. Late Fee

If you miss your payment deadline, a late fee will be imposed. Occasionally, a grace period of one to five days is granted after the due date to account for bank processing. However, it is crucial to review the terms and conditions, as the policies regarding late fees differ among lenders.

Failing to make timely payments on your loan results in accruing additional interest on a higher balance, making repayment more challenging. The CNBC reports that both PenFed and Discover Personal Loans impose late fees ($29 and $39, respectively).

4. Early Payoff (Repayment) Penalty

A number of lenders impose penalties for early loan repayment, as they anticipate earning interest for the full loan term. Therefore, if you decide to make extra payments and pay off your debt ahead of schedule, they may charge you a fee. This fee can be based on the remaining interest, a percentage of the outstanding balance, or a fixed amount.

However, there are lenders like LightStream Personal Loans, PenFed Personal Loans, and Happy Money that offer a more borrower-friendly approach. They do not penalize borrowers for early loan payoff. This means that if you have the means to pay off your loan early and achieve financial freedom sooner, you won't be burdened with any additional fees.

Factors Influencing Personal Loan Costs

Personal loans provide individuals with a financial lifeline for various purposes, but it's important to understand the average cost associated with them. The cost of a personal loan is influenced by several factors, which can significantly impact the overall expense and affordability.

1. Primary Factors Affecting Personal Loan Costs

  • Interest Rates: One of the primary factors influencing personal loan costs is the interest rate. Lenders determine the interest rate based on the borrower's creditworthiness. Those with a good credit score generally qualify for lower interest rates, resulting in a more affordable loan. Conversely, individuals with poor credit may face higher interest rates, increasing the overall cost of the loan.
  • Loan Amount: The loan amount also plays a significant role in determining the personal loan cost. Borrowers seeking larger loan amounts may encounter higher interest rates or additional fees, resulting in increased overall costs.
  • Loan Term: The duration of the loan, known as the loan term, affects the personal loan cost. Choosing shorter loan terms generally entails making higher monthly payments, but it can lead to substantial savings on overall interest costs. On the other hand, longer loan terms may have lower monthly payments but higher overall interest expenses.
  • Credit Score and History: The borrower's credit score and credit history have a direct impact on the personal loan cost. Lenders assess these factors to evaluate the borrower's creditworthiness and determine the interest rate and terms accordingly. A strong credit profile can result in more favorable loan terms and lower costs.
  • Origination Fees and Other Charges: In addition to interest rates, borrowers should consider any origination fees and other charges imposed by lenders. These fees can include application fees, origination fees, late payment penalties, and prepayment fees. It's crucial to factor in these costs when evaluating the overall expense of a personal loan.

2. Exploring Secondary Factors

  • Collateral Requirements (for secured loans): For secured personal loans, collateral is often required. The type and value of collateral can impact the loan cost, as lenders consider the collateral's worth and risk associated with it.
  • Type of Lender: Different types of lenders, such as banks, credit unions, and online lenders, may offer varying interest rates, terms, and fees. It's essential to compare offers from different lenders to find the most favorable personal loan cost.
  • Market Conditions and Economic Factors: Market conditions and economic factors can influence personal loan costs. During periods of economic instability or higher interest rates in the market, lenders may adjust their rates accordingly, impacting the overall cost of borrowing.
  • Prepayment Penalties and Fees: Some lenders impose prepayment penalties and fees if borrowers repay their loans before the agreed-upon term. It's important to consider these potential charges and evaluate their impact on the personal loan cost, especially if borrowers plan to repay the loan early.

Factors Influencing Personal Loan Interest Rates

By understanding these factors and taking proactive steps to improve your financial situation, you can enhance your chances of securing a personal loan with favorable interest rates. Remember to research and compare multiple lenders to find the best offer that aligns with your needs and financial goals.

1. Credit Score and Creditworthiness

One crucial determinant of personal loan interest rates is your credit score and creditworthiness. Lenders assess your creditworthiness to evaluate the level of risk associated with lending to you.

A higher credit score signifies a lower risk, leading to more favorable interest rates. On the other hand, having a lower credit score can potentially lead to elevated interest rates being applied.

To access better rates, it's essential to improve your credit score. Start by paying bills on time, reducing credit card balances, and avoiding new credit applications.

Maintaining a regular check on your credit report is vital to identify any errors or discrepancies and take immediate measures to rectify them. Additionally, maintaining a healthy credit utilization ratio can positively impact your creditworthiness.

2. Debt-to-Income Ratio

Lenders consider borrowers' income and existing debt when determining personal loan interest rates. Your debt-to-income ratio, which compares your monthly debt payments to your income, is an essential factor. A lower debt-to-income ratio demonstrates a better ability to handle additional loan payments, which can lead to lower interest rates.

To improve your debt-to-income ratio, consider strategies such as paying off existing debts, increasing your income through additional sources, or reducing monthly expenses. By reducing your debt burden and demonstrating financial stability, you can enhance your chances of securing a personal loan with favorable interest rates.

3. Loan Term

The duration of your loan, known as the loan term, can impact the interest rates you'll be offered. In most cases, opting for shorter loan terms is advantageous as they often offer lower interest rates compared to longer-term loans. Lenders often view longer-term loans as higher risk, which may result in higher interest charges to compensate for the extended repayment period.

When considering a personal loan, evaluate your financial situation and goals. While longer-term loans may offer lower monthly payments, keep in mind that they could accrue higher overall interest costs. Opting for a shorter loan term can help minimize the personal loan cost and enable you to pay off your debt sooner.

4. Market Conditions and Economic Factors

The overall economy and market conditions play a role in determining personal loan interest rates. When economic conditions are favorable, with low inflation and stable market performance, lenders tend to offer more competitive interest rates.

Conversely, during periods of economic uncertainty or recession, lenders may increase interest rates to mitigate potential risks. It's important to stay informed about market trends and economic indicators.

Monitor factors such as inflation rates, central bank policies, and changes in interest rates set by the Federal Reserve. By understanding the current economic climate, you can make informed decisions regarding your personal loan, taking advantage of favorable interest rate environments.

Tips for Finding Personal Loans with Competitive Rates

Remember to carefully review the terms and conditions of any loan offer, paying attention to interest rates, fees, and repayment terms. Selecting a loan that aligns with your financial goals and offers the most favorable rates can save you money in the long run.

1. Research and Comparison

When seeking a personal loan, conducting thorough research and comparison is crucial. Explore various lenders and loan options to find the most competitive rates available. Look for reputable lenders with positive customer reviews and transparent terms.

2. Improve Credit Score

Taking steps to improve your credit score can significantly impact the interest rates offered to you. Paying bills on time, reducing credit card balances, and minimizing new credit applications are effective strategies.

Additionally, regularly checking your credit report for errors and addressing them promptly can boost your creditworthiness.

3. Consider Loan Term and Amount

Both the loan term and the borrowed amount have a direct impact on the overall cost of a personal loan. A shorter loan term usually comes with lower interest rates, while a longer loan term may result in higher overall interest charges.

Similarly, borrowing a larger amount may lead to higher interest rates. Carefully consider your needs and financial capabilities when determining the loan term and amount.

4. Seek Pre-Approval

Seeking pre-approval for a personal loan can offer several advantages in finding competitive rates. Pre-approval involves providing necessary information to a lender who then assesses your creditworthiness and provides an estimate of the loan terms you may qualify for. By obtaining pre-approval, you can compare offers from different lenders and negotiate for better rates.

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