How Does Interest Work on a Personal Loan?

When you take out a personal loan, your interest payment is generally fixed. This means you'll have equal monthly payments factoring in the amount of interest you owe on top of the funds you borrow, which you'll need to make until the loan is paid off.

Your personal loan annual percentage rate (APR) includes both the interest rate you'll be charged to borrow money and any additional fees, so it represents the total cost of borrowing from a lender. Your exact APR will be determined by your credit score, with higher scores qualifying for lower rates.

It's important to understand how interest works if you're researching how to get a personal loan. Keep reading for more details.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

Fixed vs. Variable Interest Rates on Personal Loans

Although fixed-rates loans are the most common, variable-rate loans are also available, though less common. With these, your interest rate can fluctuate according to market conditions.

Here's a side-by-side look at how fixed and variable interest rates compare:

How Interest Is Calculated on Personal Loans

There are a few different ways to calculate interest on a loan, but most personal loans use simple interest.

How Simple Interest Works

Simple interest is calculated with this basic formula:

Note that there's a difference between interest rate and APR. APR is a more accurate picture of how much you'll pay to borrow money, because it includes both your interest rates and any other fees, such as loan origination fees.

An Example of a Simple Interest Calculation

Here's a look at how simple interest would work on a personal loan:

• Your loan is $10,000

• The APR is 10%

• It's a 3-year term.

According to the formula, the simple interest calculation would be ($10,000 x 0.10 x 3), suggesting that the interest would be $3,000.

This means you'd pay $3,000 to borrow the $10,000, for a total repayment amount of $13,000.

An important note: With a simple interest loan, you only pay interest on the outstanding principal balance of your loan.

• Your balance will decrease with every monthly payment you make.

• The simple interest calculation will change as you pay off more of the loan.

This means you'd pay less than the original $3,000 calculated above to borrow $10,000, with the exact amount depending on the size and the frequency of your loan payments.

What Is a Good APR on a Personal Loan?

You can evaluate whether you're getting a good APR on your personal loan by knowing what the average rates look like for different credit buckets. Here's what you should expect in the different credit score ranges:

• Excellent credit: 6% to 10% APR

• Average credit: 11% to 20% APR

• Poor credit: 20% and above APR

What Affects the Interest Rate You Get?

Your credit score is the biggest factor in determining the personal loan interest rate you qualify for, as it represents your credit risk and the likelihood that you'll pay the loan back on time.

Other factors figure into your interest rate as well, including:

• Your income

• Employment status

• The amount of money you're borrowing

• Lender type

• The length of the loan term, with lower amounts and shorter terms qualifying for lower rates than larger amounts and longer terms.

Credit unions tend to offer lower rates, especially to those with middling credit, compared to traditional banks.

Average Personal Loan Interest Rates in 2026

All interest rates are influenced by the larger market and economic environment and shift based on the Federal Reserve's target federal funds rate. This means that average loan rates can look quite different on a yearly, or even monthly, basis.

According to the Federal Reserve Bank of St. Louis (FRED), the average personal loan rate on a 24 month loan from a bank is 11.65% APR, as of Nov. 2025. This is considered an average, however, and rates vary by lender and loan type, so always shop around.

How To Lower Your Personal Loan Interest Rate

To ensure you get the best personal loan rate possible, the best thing you can do is improve your credit score. Taking out a loan and making on-time payments can improve your credit in the long run. You should also check your credit report for any errors and aim to keep your credit utilization low.

To get the lowest rate, you can also look at shorter loan terms and consider applying with a co-signer who has a strong credit score. Choosing a secured personal loan can get you a lower rate as well, as this type of loan requires collateral up front, which makes the transaction less risky for the lender.

Don't forget to compare offers from multiple lenders. This is the best way to secure the lowest rate possible.

FAQs

Is a personal loan interest rate fixed or variable?

Personal loans can be fixed-rate or variable, but fixed-rate loans are much more common.

What APR should I aim for?

Your loan APR will depend on your credit score. If you have a good credit score, you should aim for an APR between 11% to 17%, with excellent scores qualifying for lower rates and lower scores generally qualifying for higher ones.

Can I negotiate the interest rate on a personal loan?

Your best bet for negotiating the interest rate on a personal loan is shopping around and comparing offers from multiple lenders.

Does prepaying help me save on interest?

Yes, prepaying your loan can help you save on interest because you'll only pay interest on the outstanding balance of your loan, so the more you pay off, the less you will owe. However, some lenders have prepayment fees that will penalize you for making extra loan payments.

Why is the APR higher than the interest rate?

A loan's APR is higher than the interest rate because it includes both the interest rate and any additional fees you owe, such as a loan origination fee.

Sources

• FDIC. "What is the difference between fixed-rate and variable-rate?"

• FRED. "Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan."

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