What Should You Pay on a Personal Loan?
A personal loan is a type of installment loan, meaning you repay it in fixed monthly payments over a set term with interest. How much you’ll pay each month depends on three main factors: the loan amount, the interest rate and the length of the repayment period, which is called the term.
For example, if you borrow $5,000 at an interest rate of 12% with a three-year term, your monthly payment would be about $166. Over the full term of 36 months, you’d repay the entire loan — plus interest — in those monthly payments.
Adjusting any of those three factors can change your monthly payment. A longer term will lower your monthly cost, but you’ll pay more in interest. A higher loan amount or higher interest rate will increase your monthly payments.
So how can you tell whether the rate you’re offered is competitive?
Understanding personal loan interest rates
According to Bankrate, the average interest rate for a three-year personal loan in May 2025 was 12.65%. But rates vary widely — some are as low as 6.49% while others are almost as high as 36% — depending on the borrower’s financial profile.
If you receive a rate higher than the average, that doesn’t necessarily mean your lender is overcharging you. Lenders consider multiple factors when determining your rate, and not all borrowers qualify for the lowest ones.
What affects your interest rate
Your credit score is one of the most important factors lenders consider. This three-digit number reflects how reliably you’ve managed your debts in the past. A higher score signals less risk for the lender, which can lead to a lower rate.
If your credit score is low, expect a higher interest rate, which lenders use to offset the increased risk of late or missed payments.
Your credit reports matter too. These list your current credit and loan accounts and detail your payment history over the past seven years. A history of late or missed payments can make lenders hesitant, often resulting in a higher rate.
The loan term also plays a role. Longer-term loans are considered riskier, since there’s more time for you to experience financial difficulties. To compensate, lenders often charge higher interest rates on longer terms.
To improve your chances of securing a lower rate, work on building a strong credit profile. A FICO score of 740 or higher is typically considered excellent. Pay your bills on time, keep credit card balances low and consider choosing a shorter term loan if you can manage the monthly payments.
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