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It’s best to compare interest rates when shopping around to find the most affordable loan. After you prequalify and receive potential terms, plug the offer into the loan interest calculator below to see how much interest you’ll owe each month and over the life of your loan.
What Factors Affect Loan Interest Rates
The exact interest rate you pay on a loan depend on several factors, including:
- Loan type: Some forms of debt come with higher costs than others. Credit cards and payday loans charge notoriously high interest rates, whereas loans like mortgages and student loans are often more affordable.
- Market conditions: The Federal Reserve sets monetary policy for banks, which in turn impacts the interest rates that they’re willing to offer consumers for different types of loans.
- Lender: Some lenders simply charge higher rates than others. Credit unions and online lenders often charge cheaper rates than brick-and-mortar banks.
- Collateral: Loans that require collateral—something of value that the lender can repossess if you default—usually come with lower rates than loans that require no collateral.
- Credit: Your credit score tells lenders how well you’ve managed debt in the past. In general, the higher your credit score, the lower your interest rate.
- Term length: Longer term loans typically come with higher interest rates compared to shorter term loans.
- Loan amount: The more you borrow, the riskier the transaction. Lenders generally charge higher interest rates for larger loan amounts for this reason.
Related: Best Personal Loan Rates
How To Calculate Interest on a Loan
Here’s how to calculate how much interest you’ll owe:
- To start, divide your interest rate—not your annual percentage rate (APR)—by the number of payments you make in a year. That’s 12 payments if you’re paying monthly. If you have a 9% interest rate, divide 0.09 by 12 to get 0.0075.
- Multiply the periodic interest rate by your remaining loan balance to calculate that month’s interest payment. If you have a $10,000 loan balance, your first month’s interest payment would be $75 (10,000 x 0.0075).
- Then, subtract your interest payment from your fixed monthly payment to calculate how much of your payment will go toward your principal balance. If you have a fixed monthly payment of $207.58, you would pay $132.58 toward the principal for the first month.
- Repeat this calculation with your new remaining loan balance for the remaining months of your loan.
What Is the Average Interest Rate on a Loan?
For borrowers with a credit score of 720 or higher who prequalified on Credible.com’s personal loan marketplace, the average interest rate on a three-year personal loan is 12.09% as of October 2022. The average rate on a five-year personal loan is 15.63%.
The APR is a more holistic number than the interest rate alone because it also includes any fees you need to pay for the loan, such as origination fees. If you’re shopping around for loans, use the APR to compare your loan options.
Related: Best Personal Loans
How Much Loan Can I Afford?
How much loan you can afford depends on your monthly income and expenses.
If you don’t already have a budget, write down a list of all your monthly income and expenses. This includes bills, shopping and even intermittent expenses like holiday gifts and saving for vacations, retirement, emergencies and more. For intermittent expenses, estimate how much you spend in a year and divide that number by 12 to see how much you should set aside monthly.
If your expenses are higher than your income, then you’ll need to cut back on your spending or increase your income to afford any loan at all. On the other hand, if your income is higher than your expenses, the difference is what you’ll be able to afford for a loan payment. As a rule of thumb, it’s best to stay well under that limit to leave room for emergencies or unexpected expenses.
