What is personal loan interest rate?

A personal loan interest rate essentially tells you what it will cost you to borrow money. It’s usually expressed as a percentage of the loan amount.

The cost of borrowing is typically represented as an Annual Percentage Rate (APR) figure. The APR refers to the total cost of annual borrowing, including the interest rate and any additional fees. This helps you compare the cost of loans from different lenders. Our guide on the difference between APRs and interest rates goes into more detail if you want to find out more.

Much as it would be great if borrowing money didn’t cost a thing, lenders do need to make money on the funds they lend. That’s why you’ll almost always pay interest on the money you borrow.

Customers may be offered different rates depending on a range of factors, including their personal and financial circumstances. That’s because lenders need to compensate for the risk of lending. Put simply – if you’re at higher risk of defaulting on your loan and not repaying what you owe, the more likely you are to be charged a higher interest rate.

In this ultimate guide to personal loan interest rates, we’ll explore what factors affect personal loan interest rates, the difference between fixed and variable interest rates and how to improve your chances of being offered the best rates.

Will I always get the rate that’s advertised?

Lenders often advertise their most attractive rate (also referred to as a ‘headline rate’ or ‘advertised rate’) across their website and marketing activity. This is usually their representative rate too, which is the rate the majority of personal loan customers pay.

However, though at least 51% or the majority of customers are given the representative rate, the rate you’re offered (your personalised rate) may differ depending on your credit profile and how well you have managed other loans and credit cards.

What factors affect personal loan interest rates?

As discussed, there are lots of factors that influence the rate lenders offer – and some of these factors might be out of your hands. For example, lenders may charge more if the cost of borrowing increases in-line with the Bank of England’s base rate.

Your own personal and financial circumstances will affect the rate you’re offered too. Lenders will likely charge higher interest rates to riskier customers.

Let’s take a look at the factors affecting personal loan interest rates in more detail…

Economic conditions and market trends

There are many ways economic conditions and market trends significantly impact loan interest rates:

• Changes in the Bank Rate

The Bank of England, the central bank of the UK, sets the base interest rate. This is known as the Bank Rate. Any changes in the Bank Rate influence interest rates offered by lenders. For example, if the Bank of England raises the interest rate to control inflation, it’s likely personal loan interest rates will rise too.

• Inflation

Inflation is basically the rate at which the cost of goods and services rises over time. When inflation is high, interest rates typically increase. This makes borrowing more expensive, thus encouraging people to reduce their spending. This in turn lowers demand for goods and services, which is thought to reduce the rate at which prices rise (and therefore reduces inflation).

Our guide on how to cope with inflation covers this topic in more depth.

• Demand for loans

Ultimately loans are a type of product, and there’s a cost associated with borrowing money. If there’s a high demand for loans, and less competition in the market, it’s likely lenders will increase their rates. However, if competition is fierce and the demand for loans isn’t particularly high then lenders may lower their interest rates to attract customers.

• Increased credit risk

Challenging times, such as a cost-of-living crisis or recession, can increase the number of borrowers defaulting on their loans due to changes in their financial circumstances. Higher levels of inflation, and higher interest rates, also have an impact on the cost of borrowing.

Lenders continually stay up to date with financial markets, ensuring any increased rates are reasonably in-line with the general market position.

Credit score and creditworthiness

Lenders will assess credit risk when deciding whether to lend you money, and at what rate. They will look at your credit report, provided by credit reference agencies, to get a detailed overview of your credit history and assess your likelihood of being able to repay the money you borrowed. Our guide on how your credit history impacts your ability to borrow offers further insight.

In summary: if you have experience of reliably managing debt, it’s more likely you’ll repay what you owe and be the type of customers a lender wants to lend money to. However, if you’ve had difficulty managing debt in the past, this could indicate you’re more likely to default on a loan in the future.

There are lots of ways you can build your credit history and improve your credit score over time, which could give you a better chance of being offered a loan with a lower interest rate.

For example, making sure you make any repayments on time each month will prove you are capable of handling credit responsibly. You should also keep an eye on your credit utilisation, check your credit report for any inaccuracies, make sure you’re on the electoral roll and avoid applying for several loans in quick succession as this could leave multiple hard searches on your file.

Loan amount

The amount of money you borrow will have an impact on the interest rate of your loan.

A lot of lenders have an APR-based tier system, with much smaller loans typically carrying a higher APR while slightly larger loans have lower interest rates. That’s because all loans have certain fixed costs associated with them, and smaller loans generate fewer earnings to cover those costs.

Some of the largest loan amounts may also carry higher interest rates. If a customer defaults on a larger loan, this would be a much bigger loss to a lender compared to a customer defaulting on a loan for a few thousand pounds. Lenders often charge higher interest rates on big loans to mitigate this increased risk.

Loan term

Typically speaking, the longer you borrow money for, the more interest you’ll have to pay because you’re holding on to the lender’s money for longer. A lot can happen in that time. For example, interest rates could rise, which means the lender might miss out on higher earnings by lending you money at a potentially lower fixed rate. Lenders may mitigate this risk by charging a higher interest rate for longer-term loans.

While you can lower the amount of interest you pay in total by paying off your loan quicker, this will result in higher monthly repayments. So it really is up to you whether you’d prefer to pay more interest in order to spread the cost over a longer amount of time.

Loan type

There are two main types of loans: unsecured and secured loans.

Unsecured loans don’t require you to offer up any assets to secure a loan. Instead, the lending decision – including what rates you’ll be offered – will be based on your credit history, financial and personal circumstances, loan amount and term.

Secured loans require you to put up collateral, such as a house or car. The value of this collateral can influence the interest rate. A higher loan-to-value ratio may result in higher interest rates (for example, if the amount you’re borrowing is far greater than the assets you’re securing the loan against).

Unsecured loans normally carry higher interest rates because they’re considered higher a risk to lenders. After all, if you fail to pay back what you owe, the lender can’t get their money back by repossessing your assets.

Type of lender

There are many different types of personal loan providers in the UK, and each may have their own system for setting interest rates:

• Online lenders like Novuna Personal Finance are specialist personal loan providers. We typically offer competitive interest rates, and the application process is usually simple and straightforward too.
• Banks and building societies typically offer competitive interest rates as they are well-established finance providers. However, some of the best rates may be reserved for existing customers.
• Credit unions are member-owned financial cooperatives so you will usually have to be a member before you can apply. Credit unions may not offer the cheapest interest rates – particularly individuals who have a good credit score may find more competitive rates elsewhere– but they may be a good option if you have a less-than-perfect credit history. You may also find credit unions only offer personal loans on small amounts so, if you’re looking to borrow a larger amount you may need to apply with a bank or personal loan provider.
• Payday lenders offer quick, short-term loans at very high interest rates (though the cost of payday loans is legally capped so no one will ever pay back more than double what they originally borrowed). Some finance providers may automatically decline you in the future if you’ve taken out a recent payday loan.
• Peer-to-peer lending platforms allow individuals to borrow money from investors or businesses via an online platform, without a bank acting as the middleman. As the lending platform has fewer overheads compared to a traditional bank, the interest rates can sometimes be more competitive. However, peer to peer investors can choose which borrowers to lend to, and therefore what interest rate to offer. So, it’s likely you’ll only receive a good interest rate if you’re a low-risk borrower with an excellent credit score. You might also be charged additional fees as well as the interest rate being charged for taking out a loan.

Before deciding which type of lender is right for you, compare APRs across multiple different lenders. Each lender will have their own assessment criteria and scoring system so it’s a good idea to always do your research thoroughly before applying. Look out for any hidden costs or application fees and always check a lender’s eligibility criteria to make sure their products are suitable for your circumstances.

Will my income or the amount of debt I have affect the interest rate I’m offered?

While your individual affordability will not impact the interest rate you’re offered, it will be taken into consideration when a lender decides whether to accept your application.

Lenders have a duty of care to their customers, so they’ll never knowingly lend money to someone who realistically won’t be able to afford their repayments. To assess whether the additional loan repayments would put you under any financial strain, lenders will look at your employment and income, plus your debt-to-income ratio.

These factors are an important part of a lender’s decision-making process. Your affordability will impact whether your application is accepted, but it won’t impact the rate you’re offered. Lenders decide what interest rates to offer you based on the information we’ve already discussed, namely your credit score, loan amount and term.

Fixed vs variable interest rates

Most personal loans are fixed rate, which means the interest rate set at the beginning of your loan term remains constant for the duration of the loan.

Fixed rate loans help you to manage your outgoings, as your monthly repayments will stay the same each month until your loan is finished. You'll always know how much is leaving your account each month - no nasty surprises, and no worrying about how you’ll afford the extra money if market interest rates rise.

Variable rates can change monthly depending on market conditions and the Bank of England base rate. This means your monthly payments can fluctuate over time. While this can be a good thing if interest rates fall, you could be left paying a much higher sum each month if interest rates rise.

For more information on the difference between fixed and variable rates, and the pros and cons of both, take a look at our comprehensive guide.

Instalment vs revolving credit interest rates

Personal loans are a type of instalment credit, which means you’ll borrow a specific amount of money and repay it in fixed-scheduled instalments over a set period. Almost everything about the loan is fixed, including the interest rate, and therefore your monthly repayments.

Instalment credit is usually favoured by those who enjoy predictability. You’ll know exactly how much money you need to pay back and when.

Revolving credit (such as credit cards) is a more flexible form of credit, allowing you to access funds up to a certain limit which you can then repay and borrow again with no set end date.

You’ll need to pay interest on your credit card balance if you choose to carry any expenditure over into the next month, and you will always be required to pay a minimum amount. However. you’ll likely have the option to pay off your credit card balance in full by the end of the month to avoid paying any interest at all.

You’ll find both fixed rate and variable rate options across different types of instalment and revolving credit. However, you may find that – generally speaking – revolving credit interest rates are much higher.

Why does revolving credit usually have higher interest rates?

The average APR for a UK credit card currently stands at around 22.2%, which is much higher compared to the average interest rate of a personal loan. That’s because managing ongoing credit lines can be expensive and potentially risky for lenders as they can’t predict how much money their customers will borrow or the repayment timeline. It’s therefore understandable that lenders cover this cost by charging a bit more in interest. In return, customers get the flexibility and convenience of borrowing and repaying money when it suits them.

Finding the best personal loan interest rate for you

The ‘best’ personal loan interest rate is subjective and will be entirely personal to you. Lenders will decide on what interest rate to offer you depending on your individual circumstances.

As a first step, always do your research. APRs are a good way to compare the cost of a personal loan across multiple lenders. You should also check each lender’s eligibility requirements to make sure you’re only applying for loans that are suitable for you and your needs.

You should always understand what (if any) additional fees will be charged when taking out a loan. For example, some lenders will charge an application or arrangement fee. We do not charge any such fees.

How to lower personal loan interest rates

Lenders predominantly assess credit risk and affordability when deciding whether to offer you a loan, so the best way to boost your chances of being offered a low interest rate is to ensure you have a strong history of managing debt and are in a comfortable position to afford the repayments.

While there’s no such thing as one universal credit score, using an online checker to get an idea of your score might be helpful. Armed with an indicative idea of how other lenders might view you as an applicant, you can start to identify ways to improve your score and build up your credit history.

It’s also a good idea to get a free copy of your credit report from each of the three main credit reference agencies before applying for finance. Make sure the information is accurate and free from any errors that could affect your application.

Finally, don’t apply for lots of different loans at once. Yes, you want to get the very best rate, but submitting full applications to several different lenders could actually hinder your chances of getting a loan at all. That’s because each full application leaves a footprint (called a hard search) on your credit report – and lots of these hard credit searches could be a red flag to a lender.

Can I negotiate my personal loan interest rate?

It’s not usually possible to negotiate your personal loan interest rate, as most traditional lenders will have strict criteria with regards to the APR’s being offered.

However, if you have an existing relationship with a lender, you could always research whether they offer preferential interest rates to existing customers.

Another possibility is increasing or decreasing your term, which may help to make the loan more affordable. If you’ve applied for a loan and found the interest rate offered higher than you were expecting, you could potentially increase the loan term to bring your monthly repayments down (though you’ll pay more interest in total this way, as you’ll be borrowing money for longer). However, if your sole focus is on lowering your interest, sticking to a shorter loan term and paying more each month will clear your debt quicker – and you’ll pay less interest in the process.

Managing personal loan interest rates

Once you’ve found a loan with an interest rate that work for you, it’s time to start thinking about ensuring you will be able to manage the loan before applying.

The importance of making payments on time

If you have a fixed-rate loan, your current rate will remain the same for the duration of your term. However, ensuring you keep up your monthly repayments is extremely important – as this could impact being able to borrow in the future.

What happens if I miss a payment?

All missed or late payments will be recorded on your credit file which could affect your ability to borrow later down the line.

The way a missed payment impacts your interest rate will depend on your lender, the type of loan, the terms and conditions of your loan, your individual circumstances and how quickly you work with your lender to resolve any missed or late payments.

Always speak to your lender as soon as possible if you are facing financial difficulties and feel you can’t keep up your repayments. There may be a number of potential options available to support you.

Consolidating debt could reduce the total interest paid

Debt consolidation loans could allow you to combine all your debts into one monthly repayment. It works by calculating how much you owe, taking out a loan for this amount and using your loan money to pay off your other debts. This could leave you with just one fixed-rate monthly repayment to think about. Consider the option of debt consolidation carefully, ensuring the fixed-rate monthly repayments may be affordable for you before applying.

A debt consolidation loan can help you to track how much you have left to pay, without worrying about how to prioritise lots of different debts of different sizes and interest rates.

If you’re currently paying high interest rates across different debts, such as credit cards, you could find a debt consolidation loan lowers the amount of interest you pay too – but only if the level of interest is lower than that of the debt consolidated. The interest rate of your debt consolidation loan should be lower than the interest rate of your existing loans to make the process cost-effective, though you should also take any fees and charges (such as early repayment or application fees) into account.

Don’t forget that spreading loan repayments over a longer period might bring your monthly figure down, but it may result in a larger amount of interest to pay in total.

Can you refinance a personal loan?

Yes, it is possible to refinance a personal loan. You can apply for a new loan and, if accepted, use the funds to cover your current loan’s outstanding balance.

There are a few benefits to refinancing your loan:

• You could ‘top up’ your loan by applying for a larger amount and paying off the remaining balance of your current loan. Any new loan you take out may have a different interest rate, though, so always compare the costs between your current loan and any ‘top up’ loan before applying. If the interest rate of a new loan is higher than your current loan, it might be worth applying for a separate loan for the extra money you need with the view to making two different monthly payments.
• Applying for a new loan with a longer repayment term could bring your monthly repayments down (though you may pay more interest in total). This may be a suitable option if your circumstances have changed, and you would find a lower monthly repayment more manageable. However, always speak to your current lender first to find out if there are any other options or payment plans available to you before applying for a new loan.
• If your current loan carries high interest but you believe you can get a better rate now, either due to a change in your circumstances or a change in the market, refinancing could be a good option for you. There’s no guarantee you’ll be offered the lower rate, however, so do your research carefully before applying. Compare all aspects of both loans, including the total amount of interest you’ll pay plus any additional fees or charges.
• You could save on interest by refinancing a loan and shortening the repayment period. However, some lenders (like us), allow you to make unlimited overpayments so you can pay off the money you owe at a pace that suits you without incurring penalty charges.

Before going ahead and refinancing your loan, check the terms and conditions on both your current loan and the one you’re applying for. You could be caught out by early repayment fees or application fees, which may make the process less cost-effective.

The impact of overpaying on your loan interest

Making extra payments on your personal loan could help to reduce the duration of your agreement. This, in turn, might lower the amount of interest you pay in total though this isn’t always guaranteed.

When you make an overpayment that’s more than your regular monthly repayment, your regular Direct Debit usually won’t change. Instead, your loan term will be reduced so you’ll pay your loan off faster. However, some lenders do offer the option for you to keep your original loan term and reduce your monthly payments instead.

Check the terms and conditions of your loan before making overpayments, as some lenders might charge a fee for making extra payments. This could defeat the whole object if the aim of making extra payments is to save a bit of money in interest charges.

At Novuna Personal Finance, we allow our customers to make unlimited overpayments without incurring any penalty charges, though you may be charged up to 58 days’ interest if you settle your loan early. Customers can make extra payments online, via our app or by speaking to our customer service team; making managing a loan smooth and simple.

Early repayment and its effect on interest

It is possible to settle your loan early. Depending on the lender, you might only need to pay interest up until the point at which you settle your balance.

Do check your credit agreement thoroughly, though, as some lenders will charge you a certain amount of interest plus a further fee. Lenders may only charge up to 28 days of interest if you have less than 12 months left on your loan, or up to 58 days’ interest if you have more than a year left of your loan term.

These charges might make settling your loan more expensive, depending on how far into your loan term you are and what balance is outstanding.

Interested in finding out more about personal loans?

Our blog covers all things personal loans to help you understand more about your credit score, what you can use a personal loan for and the main questions you need to ask yourself when applying for a loan.

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