The term “annual percentage rate” is commonly used for lending products such as mortgages, credit cards and personal loans.
The APR for a personal loan is the combined total of the interest rate plus the origination fee, calculated on a yearly basis and expressed as a percentage. If there are no fees, the APR equals the interest rate.
How does APR work on a personal loan?
When you’re shopping for personal loans, the APR provides an apples-to-apples cost comparison. The interest rate or monthly payment alone does not reflect the true cost of the loan.
Personal loans are fixed-rate installment loans, meaning your interest rate won’t change over the loan term. Terms are typically two to seven years, and you pay the loan back in equal, monthly installments. Lenders assign an interest rate based on your credit score, credit history and debt-to-income ratio, among other factors.
Personal loans can come with an upfront origination fee ranging between 1% and 10% of the loan amount. Lenders consider factors like credit score, loan amount and income when calculating the fee. When the interest rate and the fee are combined, you get the APR for the personal loan.
Many online lenders and some banks and credit unions let you pre-qualify to check your estimated rate without affecting your credit score.
APR vs. interest rate
Let’s see how APR helps you choose a loan. Assume you want to borrow $5,000 and repay it over three years. You pre-qualify with two lenders and receive the following rates:
|
Lender 1 |
Lender 2 |
|
|---|---|---|
|
Interest rate |
10%. |
11%. |
|
Origination fee |
$150 (3% fee). |
$100 (2% fee). |
|
Monthly payment |
$161. |
$164. |
|
APR |
12.1%. |
12.4%. |
|
Total interest |
$808. |
$893. |
Initially, it’s hard to know which loan is cheaper. One lender offers a lower interest rate but charges a higher fee. The monthly payment is almost equal.
That’s when APR comes in: The first loan has an APR of 12.1% and the second loan has an APR of 12.4%. The loan from Lender 2 has higher total interest and a higher APR, making Lender 1 the less expensive option overall. Now you can confidently compare the total cost of both loans and choose the right one.
We generally recommends picking the loan with the lowest APR for a given loan term because it’s always the cheapest option.
In some cases, it can make sense to choose the higher-interest-rate loan — if the monthly payment is a better fit for your budget, for instance, or if the origination fee is lower. Some lenders deduct this fee upfront, so even if you get approved for a $5,000 loan, you may get less in hand.
What is a good APR for a personal loan?
Borrowers with good to excellent credit scores (690 and higher) will likely receive the lowest rates. Your credit score isn’t the only factor lenders review on an application, but it’s often an important one.
Here’s what personal loan interest rates look like, on average:
|
How’s your credit? |
Score range |
Estimated APR |
|
Excellent |
720-850. |
12.83%. |
|
Good |
690-719. |
15.56%. |
|
Fair |
630-689. |
18.30%. |
|
Bad |
300-629. |
21.38%. |
Source: Average rates are based on aggregate, anonymized offer data from users who pre-qualified in lender marketplace from June 1, 2023, through June 31, 2023. Rates are estimates only and not specific to any lender. The lowest credit scores — usually below a 500 credit score — are unlikely to qualify. Information in this table applies only to lenders with APRs below 36%.
Bad-credit loan APRs
If you have bad credit (629 or lower), you may still qualify for a personal loan. Some lenders work specifically with bad-credit applicants and consider other factors on your application, like your monthly free cash flow, education or where you live. It’s especially important to compare multiple lenders if you have bad credit.
Bad-credit borrowers will likely receive an interest rate on the high end of a lender’s range. Look for an APR below 36%, which consumer advocates agree is the highest rate an affordable loan can have, and make sure the monthly payments fit comfortably in your budget.