Let’s talk about how a credit union can get you a better interest rate on your personal loans

If you are searching for an affordable personal loan, then you’re probably focusing on the banks. But did you know that your local credit union also provides personal loans? You should always shop around to find the best rates and terms when getting a loan. Now let’s talk about how a credit union can get you a better interest rate on your personal loans and other important factors that influence your ability to get the best loan possible.

The Benefits of Borrowing from Your Local Credit Union

When you’re searching for a personal loan, your local credit union should be your institution of choice. This is especially so if you have a fair or poor credit score. Credit unions are more lenient with credit scores because they listen to their members. These favorable terms include:

  • Lower interest rates
  • Longer repayment window
  • Consideration of factors other than your credit score

Exploring How a Credit Union Personal Loan Works

Credit unions are not-for-profit financial institutions that focus on serving their members. Fortunately, these institutions are managed by the members via an elected volunteer board. Therefore, a credit union usually works in its members’ best interests.

It’s easy to become a credit union member once you meet its particular eligibility requirements. These may require that you live, work, or go to school in a particular geographical region. Others may require that you are employed by a certain company or within a given industry, or you are a part of some religious or social group.

You generally pay a one-time membership and an account deposit of up to $25 to join a credit union. However, you should note that you must become a member of a particular credit union before applying for a loan from that institution.

Most credit unions offer a mix of both unsecured and secured personal loans. Both types of loans tend to have fixed interest rates. However, the interest rate that you’re offered will depend on your credit score, credit history, income, and existing debts.

We want you to bear in mind that a low credit score will not bar you from getting a loan. Credit unions tend to consider your full financial standing (like credit history and standing as a credit union member) as they evaluate your loan application. But this doesn’t mean that you shouldn’t work to improve your credit score. A great score will always get you a lower and more attractive interest rate than someone with poor credit.

Since credit unions vary in size, the loan application, approval criteria, interest rates, and other terms will also differ. Some credit unions only allow online applications, while others may need you to start the application online, but visit a branch to complete paperwork.

Changes in the Average Personal Loan Interest Rate

The average personal loan interest rate fluctuates, and it’s currently at a low level. Several factors influence the interest rate on your loan:

  • The Federal Funds Rate or the rate at which financial institutions (like banks) borrow money.
  • The intended use of the loan.
  • The loan term or the repayment window.

Now let’s explore the fluctuations in the average personal loan interest rate:

Year  Average Personal Loan Interest Rate*
2015 9.75%
2016 9.69%
2017 10.13%
2018 10.32%
2019 10.32%
2020 (Quarter 2) 9.50%

*These rates are for a 24-month personal loan.

Ideally, you want to borrow when interest rates are low and/or falling.

Average Personal Loan Interest Rate Varies by State

Did you know that where you live can influence the interest rate on your personal loan? The lending laws vary by state, with some interest rates varying by as much as 5%. Let’s take a look at the average personal loan interest rates by state in 2019:

State Average Interest Rate (%)*
Alabama 9.26
Alaska 11.04
Arizona 9.71
Arkansas 8.86
California 10.26
Colorado 9.17
Connecticut 9.85
Delaware 8.78
District of Columbia 9.1
Florida 9.07
Georgia 8.6
Hawaii 6.76
Idaho 9.55
Illinois 9.28
Indiana 10.06
Iowa 9.89
Kansas 10.62
Kentucky 9.46
Louisiana 9.44
Maine 10.42
Maryland 9.28
Massachusetts 9.5
Michigan 9.42
Minnesota 9.22
Mississippi 8.47
Missouri 10.19
Montana 8.65
Nebraska 8.7
Nevada 9.58
New Hampshire 9.5
New Jersey 9.9
New Mexico 9.92
New York 8.91
North Carolina 9.37
North Dakota 8.57
Ohio 9.69
Oklahoma 10.02
Oregon 9.45
Pennsylvania 9.29
Rhode Island 11.39
South Carolina 9.55
South Dakota 9.1
Tennessee 8.9
Texas 9.07
Utah 9.13
Vermont 9.57
Virginia 9.48
Washington 9.6
West Virginia 11.83
Wisconsin 10.25
Wyoming 9.23

*$5,000 unsecured personal loan, 36 months

Hawaii had the lowest personal loan interest rates of all 50 states at 6.76%. But, West Virginia had the highest interest rate of 11.83%.

Your Choice of Lender Determines Your Interest Rate

If you choose to get your personal loan via a traditional bank, then you could pay a higher interest rate. However, since credit unions are member-owned, they tend to offer lower interest rates. The National Credit Union Association (NCUA) showed that credit unions can offer lower interest rates:

Type of lender Average Interest Rate as of March 2020
Traditional bank 10.21%
Credit unions 9.28%

Your Credit Score and Your Personal Loan Interest Rate

Your personal loan is unsecured debt, which means that funds are not backed by any collateral like a house or a car. This fact is also why your personal loan interest rate may be higher than the interest rate on your mortgage and car loans.

Credit scores range from 300 to 850. A higher credit score (as close to 850 as possible) will give you a better chance at a lower interest rate. High credit scores translate to lower risk for lenders, which makes it more likely for personal loans to be approved.

According to statistical data from Bankrate, your personal loan interest rate varies a lot with your credit score. These rates range from about 10% for those with great credit scores to over 20% for those with lower credit scores.

Credit Score Range High-End Personal Loan Interest Rate
720 and above 12.5%
690 to 719 15.5%
630 to 689 19.9%
629 and below 32%

Make sure that you keep track of your credit score (especially when you’re searching for a personal loan). We recommend that you track your credit score so that you are fully informed in your search.

Your Debt-to-Income Ratio and Your Personal Loan Interest Rate

All lenders will consider your debt-to-income ratio (DTI). This is calculated by dividing your total debt payments by your gross monthly income.

The debts that are included in your DTI calculation are student loans, credit card bills, auto loans, mortgages, and any other personal loans. A lower DTI means that you have more space in your budget to take on a new payment. This makes it less likely for you to default, so you may also enjoy a lower interest rate.

How to Compare Personal Loans

Let’s discuss some key factors you should consider when searching for a personal loan

Some lenders allow you to estimate your interest rate on your personal loan without submitting a full application (or a pre-qualification process). This generates a soft inquiry that won’t impact your credit score. However, submitting a loan application will result in a hard inquiry which may affect your score.

You should shop around when you’re looking for a personal loan and get a range of interest rates from several lenders. However, it’s equally important to be able to compare the different options so that you can choose the best one. Here are a few criteria that you need to consider:

  • Annual Percentage Rate (APR): The APR is the cost you pay annually to borrow money, including fees. It’s often expressed as a percentage. It also reflects the total cost of your loan. The APR is vital when you’re choosing a personal loan.
  • Loan term: This refers to the length of time (or the number of installment payments) it will take to pay off the loan. You should note that shorter loan terms often mean lower APRs.
  • Discounts: Always inquire about discounts that may be available. You may be able to lower your rate by getting a loan from a financial institution where you already have other accounts. Also, setting up automatic payments may yield a discount.
  • Monthly payment: You need to be able to comfortably service or pay down your loan. So you need to be very clear about how much you will pay per month. Make sure that the payment fits within your current budget. You should also be able to service other debts and pay for your essential expenses.
  • Fees: You must be clear about how much a lender will charge in origination fees, late fees, or prepayment penalties. Prepayment penalties are fees for paying off the loan early. Make sure that everything is clear.

The Impact of Searching for Personal Loans on Your Credit Score

While it’s important to shop around for the best interest rate and loan terms, you need to be careful. Submitting multiple loan applications to several lenders will lead to several hard inquiries on your credit report. These hard inquiries can have a minor negative impact on your credit score. The good news is that these inquiries fall off your credit report after two years.

However, you can avoid these multiple hard inquiries on your credit report by comparison shopping within a small window of time. This will minimize the impact on your credit score. Most credit scoring models will regard several hard inquiries for the same type of loan as a single event if they occur within a few weeks of each other.

In addition to prequalification, some lenders may also offer you preapproval. This means that the lender will take steps to determine your qualification for the loan. The good news is that preapprovals only result in soft inquiries.

Personal loans can benefit your credit score if you have a history of paying on time and if they are different loan types. However, late or missed payments will cause your credit score to fall. This will limit your ability to access other loans with favorable terms.

Get a Personal Loan With Your Local Credit Union

We have discussed how a credit union can get you a better interest rate on your personal loans. We’ve also considered some essential factors that you need to bear in mind when searching for and getting a personal loan. Riegelwood Federal Credit Union offers personal loans at attractive rates and terms. Contact us today to discuss how our loan products can help you achieve your financial goals. We look forward to meeting you!