Why your personal loan rate might be higher than you expected

In many situations, personal loans can be powerful financial tools. They can be used for emergency expenses like car repairs, big projects like home improvements, and paying off high-interest debts with debt consolidation.

Personal loans are widely offered by lenders, so you have many different choices for where and how to apply for a loan. It’s good to shop around for personal loans. While you do, remember that the interest rate you see advertised isn’t always the rate you’ll get.

Personal loan lenders tend to advertise the lowest possible interest rate—not the rate that is most commonly offered to borrowers.

Only a fraction of applicants qualify for the lowest advertised rate. Everyone else asks, Why is my personal loan APR so high?

If you're one of them, you're definitely not alone. And the reason why your personal loan rate is higher than you expected might not be your fault or even within your control. Let's find out why personal loan APRs are sometimes surprisingly high, and how you can use this experience as a chance to get lower rates in the future.

Why personal loan rates vary (and which factors have nothing to do with you)

Lenders charge interest because that's how they make money on loans. Not every loan carries the same costs for the lender, however.

Your interest rate is only one part of the total cost of borrowing money with a personal loan. Your APR (annual percentage rate) is your interest rate plus fees and other financing charges. Some lenders charge origination fees (an upfront charge on your loan) that get included in your APR. So that’s a big reason why your personal loan APR often ends up higher than the interest rate a lender first quoted you.

How risk shapes your personal loan rate

Some loans are more expensive for lenders because they have a higher risk of not being paid back. Risky borrowers tend to get charged higher interest rates. That’s because lenders need to cover themselves for the risk of not getting repaid.

Personal loans are typically unsecured, which means the loan doesn't have any collateral, or something of value to back it up. Without that collateral, the lender has limited options for getting its money back if you stop making payments. It may end up writing off the loan. In that case, the lender has to eat the loss.

A higher interest rate means the lender makes a bit more money on the loan each month, which could help balance the loss if the borrower stops making payments before the loan is paid off.

Lenders look at a few important details to calculate how risky a loan might be to approve. That risk level goes into deciding how much they should charge. A lot of these factors involve you and your ability to repay the loan:

• Income. Lenders like to see a stable, steady, and sufficient income. You'll often get a lower interest rate if you have reliable income.

• Debt level. Lenders want to know about your other debt because it could impact your ability to repay another new loan. From a lender's perspective, the less overall debt you have, the better. This is often measured as the debt-to-income (DTI) ratio.

• Credit history. Your credit score matters, but so does your credit report. Lenders will check to find out how often you miss payments and your current debt situation.

• Co-signer or collateral. Some lenders allow you to add a co-signer to your loan, which could help improve your loan rate. Sometimes you can use collateral, or something of value like a savings account, to boost your odds of getting a better personal loan rate.

• Loan size. Bigger loans take more time and work to repay, and there's more money at risk for the lender if you fail to make payments. That's why lenders generally increase personal loan interest rates for larger loan amounts.

• Term length. Longer-term loans are often riskier because there's more time for something to go wrong during repayment, like if you get laid off or get sick. For that reason, longer terms on personal loans will typically come with higher interest rates.

Other factors that can cause rates to vary

Sometimes it's not you. Your personal loan interest rate could be higher than expected because of things that you have no control over. Here are two common ones:

• Economic changes. Most lenders base their rates on rates set by the Federal Reserve. If the Fed raises interest rates, as it does sometimes when inflation is high, lenders often bump up personal loan rates, too.

• Lender policies. Some lenders simply set higher standards for their borrowers than others and charge rates accordingly. Some lenders also specialize in bad credit loans and might charge higher rates overall.

What you can control next time

Your rate on a loan is determined by your financial situation at the time you apply. That means you're not stuck with high-rate loans forever. Consider these tips that could improve your ability to qualify for a lower rate the next time you need to borrow money:

• Start with Achieve. You can prequalify through Achieve Personal Loans to check your potential rate first. A soft credit check during prequalification won't affect your credit score.

• Compare lenders. Comparison shopping isn't just for goods; you can often find a better loan rate if you shop for a personal loan with a few different lenders. Check online lenders as well as local banks and credit unions.

• Build your credit score. Your credit is a huge factor in your loan rate, so any improvements here could pay off big on your next loan. It's always a good time to work on growing your credit score.

• Save up an emergency fund. If you have a stash of money ready to go when an emergency crops up, you'll have more options for dealing with financial issues. That means that when you do borrow money, it's more likely to be on your terms.

• Increase your income. If you're able, think about ways to increase your take-home pay, like switching jobs or starting a side hustle. This could help your finances overall, not just your ability to get a loan.

Already took out the loan? Here's how to make it work for you

If your current personal loan interest rate is high, it's true you'll pay more over time for the loan. Here's what's also true: You can still use this as an opportunity to improve your financial picture. Here's how to help that happen:

• Stick to a budget. Lots of budgeting styles are out there. Find one that works for your personal situation so it’ll be easier to stay on top of your debt.

• Set up autopay. An on-time payment history is the foundation of good credit. One way you could avoid missing payments is to put all of your bills—including your personal loan—on autopay.

• Pay extra when you can. You could pay less interest over time if you make extra payments on your personal loan—plus you could get rid of it sooner, too. Consider putting extra windfalls toward your debt, or even adding a little bit to your monthly payment. (But first, make sure your personal loan doesn’t charge a prepayment penalty.)

• Refinance your loan. If you've made some credit improvements and you're able to qualify for a lower interest rate, it could make sense to take out a new loan to pay off your old one. Make sure you consider any extra fees for the new loan, though, as they could make refinancing the wrong choice.

Wrap-up: Your rate today isn't your forever rate

No one starts out by getting the very best personal loan rates. So if your personal loan interest rate is too high, don't think of it as a strike against you. Instead, think of each on-time monthly payment you make as another chance to boost your credit score and improve your loan rates in the future.

Achieve is not a credit repair organization and does not provide or offer services or advice to repair, modify, or improve your credit.

Find out if you qualify through Achieve Personal Loans today.