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Why are Personal Loan Rates so High?

Chris Gottschalk

Chris Gottschalk About The Author

Sep 19, 2023 4:45:00 AM

If you’ve ever researched loan rates, either because you’re looking to take out a loan or because that’s the sort of thing you enjoy, you might have noticed that personal loan interest rates are pretty high. Granted, interest rates are high for every loan right now, but personal loan rates always seem to be higher than other types of loans. Why is that?

Believe it or not, there’s a good reason why personal loan rates are higher than many other types of loans. Once you understand the reasoning behind this, you’ll not only know why you pay more interest on a personal loan, you’ll also have a better idea of whether a personal loan is the right choice for your needs.

Here’s why personal loan rates are so high

why are personal loan rates so high

Personal Loans are Unsecured

In order to understand why personal loan rates are higher than the interest rates for other loans, you first have to understand the difference between secured and unsecured loans. When you get a secured loan, you’re putting up something as collateral while you’re repaying your loan to the borrower. Types of secured loans can include:

  • Auto loans
  • Mortgages
  • Home equity loans
  • Manufactured home loans

Personal loans and personal lines of credit, on the other hand, are unsecured. That means you’re not putting down any collateral for the loan, and lenders are judging whether you’ll pay off the loan based on your creditworthiness, which for most people means their credit score.

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Personal Loans are Riskier

If you read the above description of secured and unsecured loans, the thought might have crossed your mind that unsecured personal loans are kind of risky to give out. It probably won’t surprise you that lenders have thought of this, too. This leads to an interesting question--how can lenders minimize the risk of giving out unsecured loans?

This is where the higher interest rate comes in. It’s a way for lenders to cover their losses if a borrower defaults on their loan—and it’s also an excellent incentive for borrowers to pay off their loans promptly.

It's worth pointing out that even with this higher interest rate, personal loans still have a lot of advantages for borrowers. For instance, you can use a personal loan to reach almost any type of financial goal, from getting out of debt to buying hobby gear. You also don't need existing collateral when applying for a personal loan, just your identification and your credit history. 

Speaking of which...

why personal loan rates are high

Your Credit Score Plays a Role

Your credit score also affects how high personal loan interest rates are. Okay, technically your credit score plays a role in how much interest you’ll pay for every loan, but it’s still worth pointing out. In fact, your credit score might carry more weight when you apply for an unsecured loan, since lending advisors want to make sure they’re lending money to someone they can trust to pay it back.

If you have a good credit score, lenders will know you have a track record of being a trustworthy borrower and reward you with a correspondingly lower interest rate. On the other hand, if you don’t have a good credit score, lenders will charge you more interest, as you’re potentially more at risk of defaulting on your loan. This is why you need to check your credit score before you apply for a loan and, if it needs work, take steps to raise it if possible.

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Use a First Alliance Credit Union Personal Loan to Reach Your Financial Goals

A personal loan is one of the most versatile loans available, but it does have a higher interest rate than other loans. This is because it is an unsecured loan, which makes it riskier for lenders to give out. The higher interest rate helps them cover their potential losses. 

Of course, personal loan rates vary between financial institutions, and you’ll find very reasonable rates at First Alliance Credit Union. You’ll also find that our lending advisors will treat you as more than your credit score. They’ll help you figure out if a personal loan is your best solution, and if it is they’ll guide you through the application process and even give you additional resources to help you pay off your loan, like the free downloadable budget creator on our resources page.

We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.