What Is Personal Interest?

Personal interest is interest that individuals pay on personal and consumer loans. It is the cost charged to personal loan borrowers for the privilege of using money provided by their lender. However, interest on personal loans can often be tax deductible—or non-deductible—depending on the type of loan that is involved.

Key Takeaways

  • Personal interest is the interest paid on personal and consumer loans. 
  • The benefits and interest rates involved with a loan will vary greatly based on loan type.
  • Certain measures, such as using secured collateral for a loan, can often afford borrowers far lower interest rates than could be obtained otherwise.
  • Student loans are unique, in that the interest involved can be tax-deductible. 

How Personal Interest Works

Personal interest is required on a wide range of personal loan products. Product options will have varying benefits and interest rates charged to borrowers. Generally, a borrower’s credit profile will be a significant factor influencing the rate of interest that they are obligated to pay.

Lenders will typically have advertised rates of interest that serve as a base for interest rates on credit products. Personal loan underwriters will usually focus on a borrower’s credit score and debt-to-income when making approval decisions on a loan. These personal credit profile factors will also be influential in determining the borrower’s contracted rate of interest. Borrowers with higher credit scores can expect to pay lower rates of interest on credit products than borrowers with lower credit scores, who will typically be charged higher rates of interest.

Pairing with a cosigner who has good credit reliability can often afford borrowers the ability to acquire loans at a lower interest rate than they would otherwise get.

Special Considerations 

In the credit market, a number of lending solutions also exist to help borrowers consolidate their outstanding debt for a lower comprehensive rate of interest. Personal consolidation loans can support this initiative. Many borrowers will also choose to obtain a home equity loan at a low personal interest rate specifically for the purpose of paying down high-interest rate debt.

Types of Personal Interest 

There are a wide variety of credit products offered to consumers that require personal interest to be paid to the lender. Credit products can also be used for a wide range of purposes.

Many borrowers will rely on credit cards as a primary source of funding for personal purchases. Standard credit cards from traditional lenders will have personal interest rates that range up to approximately 25%. Subprime lenders may issue credit cards that charge consumers rates of interest ranging up to 36%. Credit cards are a useful source of funding for many borrowers because they allow for a revolving line of credit that consumers can use whenever funds are needed.

Non-revolving loans also encompass a large portion of the credit market products that is available for personal borrowers. Non-revolving loans can be relied on for large lump sum purchases and are especially popular in cases when secured collateral is involved. With the use of secured collateral, many borrowers manage to obtain much lower rates of interest. This is because these products provide the lender with full recourse in the case of default.

Student loans are also a popular type of non-revolving personal loan that is often used to help pay for educational expenses. Student loans are one of the only personal loan products that allow for a tax deduction of interest payments which can help lower a borrower’s annual tax bill.