To qualify for a personal loan, most lenders are looking for borrowers with credit scores in the neighborhood of 670. That doesn’t mean you can’t qualify with a lower credit score, but it may affect how much you can borrow and the interest rate you’ll be charged.
To make sure you’re getting the most value from a personal loan, it’s important to understand what a personal loan is and how your credit score can affect your ability to get one.
What Is a Personal Loan?
A personal loan lets you borrow a lump sum of money upfront from a lender (like a bank, credit union or online lender). You pay back the loan by making regular monthly payments (aka installments) over a fixed period of time.
You can use the loan money for a few different reasons. But, the most common reasons for taking out personal loans are debt consolidation, paying off high-interest credit card balances or emergency loans.
When you’re shopping for a personal loan, you’ll want to consider these variables as you compare offers:
- Interest: The amount the lender charges you to borrow money, usually represented as a percentage.
- Fees: They are additional costs to borrow money. Fees can include a loan origination fee that’s added to your balance upfront or an annual fee that’s added to your loan balance each year. If you pay off your loan ahead of schedule, you may be charged a prepayment penalty, so check with your lender about possible prepayment charges.
- Annual percentage rate (APR): When lenders list their loans, they’ll usually list the APR. The APR includes the annual cost of both the interest and the fees on the loan. It’s helpful because it gives you a sense of the cost of the loan beyond the interest rate.
- Repayment term: It’s the length of time you have to pay off the loan, usually ranging from 24 – 84 months (2 – 7 years). A longer loan term can reduce your monthly payment but increase your interest rate, increasing the amount you’ll pay in interest over the life of the loan.
What Is Your Credit Score and How Does It Affect Your Personal Loan?
Your credit score is a number between 300 – 850 that lenders use to measure your creditworthiness. The higher your score, the better your credit.
When you apply for a personal loan, the lender checks your credit score and uses it to determine if you qualify for the loan.
If you qualify, the lender will also use your credit score to decide what interest rate they’ll charge and how much they’ll lend you.
To help you get a sense of how your credit score might affect your interest rate, here’s a helpful breakdown using the FICO® credit score model.
|Credit Score Range (FICO®)||Anticipated Interest Rate|
|300 – 579 (Poor)||It may be hard to qualify for a personal loan.|
If you do qualify, expect to pay interest rates of 25% or higher.
|580 – 669 (Fair)||You can probably qualify for a personal loan.|
Expect interest rates higher than 15%.
|670 – 739 (Good)||You’ve got a great chance of qualifying for a personal loan.|
Expect interest rates of 9% or higher.
|740+ (Very Good/Excellent)||Congrats! You have excellent credit. |
Lenders will offer their most competitive rates, usually 5% or higher.
Every lender has its own criteria, so these ranges aren’t exact. Lenders will also consider your income and other factors when determining what interest rates they can offer.
Your credit score can also affect the amount of your personal loan.
Personal loan amounts tend to start around $1,000 – $5,000 and can go as high as $100,000.
Even if a lender advertises that they can lend up to $100,000, there’s no guarantee that you’ll qualify for that much. The amount you’ll be able to borrow will depend on your credit score and other considerations, like your income, your debt-to-income (DTI) ratio and your financial history.
What Goes Into My Credit Score and How Can I Improve It?
Understanding the effect your credit score can have on your ability to get a personal loan, you may be wondering what to do if your credit score is hovering at the lower end of the spectrum.
The first things first: get to know the credit bureaus. Your score is reported by one of three credit bureaus: Equifax®, Experian™ or TransUnion®. Each bureau has its own formula to calculate your credit score, but these are the biggest factors all three bureaus take into consideration:
What is it? It tracks how consistently you pay your bills on time. This includes everything from your credit card to your student loans and utility bills. A single late payment can stay on your credit report for up to 7 years.
How can I improve it? Avoid late payments. If you can, use autopay to make sure your bills are always paid on time. You usually have a 30-day grace period before a late payment shows up on your credit report, so try to pay the bill as soon as possible.
Credit utilization ratio
What is it? It’s a fancy-sounding term that measures how much you owe versus how much you can borrow. If your credit card balances are consistently close to your credit limits, chances are your credit utilization ratio is high.
How can I improve it? Paying down your balances will improve this number. You can also try and get added to the credit card account of a family member with better credit.
Credit history and credit mix
What is it? Lenders want to see that you have a history of using credit responsibly, as well as the ability to handle different types of credit and multiple lines of credit. They want to see that you make timely payments and aren’t overusing your credit.
How can I improve it? Avoid taking out too many loans or racking up too much credit card debt in a short period of time. If you’ve always relied on credit cards, and don’t plan on buying a car or home, a personal loan can help diversify your credit portfolio.
What if I Have Bad (or No) Credit and Need To Get a Personal Loan Quickly?
If you don’t have the time you’ll need to improve your credit score before talking to a personal loan provider, there are options available. Just be prepared for higher interest rates when you borrow.
These unsecured personal loans are designed to help borrowers with credit scores between 300 and the low 600s.
Not every lender offers these loans, and you can expect to pay more in fees and interest if you get one.
Interest rates on bad-credit loans can easily go as high as 36%. While this may be a necessary short-term solution, you’ll want to look for ways to pay off the loan as quickly as possible.
If you plan on paying off the loan early, remember to check the loan’s terms. Make sure the lender won’t charge you an early repayment penalty.
Sometimes called “fresh start loans” or “starting over loans,” credit-builder loans are secured personal loans designed to help people looking to build a credit history or improve their credit scores.
With these loans, you deposit money into a bank account that is held by the lender. After each payment, more of the money in the account is “unlocked” and becomes available to you. When the loan is paid back, you get the entire amount you deposited back.
Your monthly payments are reported to the three major credit bureaus, and that can help you build your credit history.
Heads up: These loans aren’t widely advertised by lenders, so you’ll have to ask for them.
Another way to get better terms on a personal loan is to have someone with better credit co-sign the loan with you. Given the co-signer’s good credit and credit history, a lender is more likely to approve you with a co-signer.
A co-signer agrees to pay back the loan if you can’t. So, make sure you and your co-signer understand what’s expected from both of you. After all, if you miss a payment, it could hurt your co-signer’s credit as well.
Getting the Right Personal Loan for Your Credit Score
If you need money quickly, anticipate a big future expense or want to take control of your higher-interest debt, a personal loan can be a powerful solution.
Check your credit score before you talk to a lender. It can help you figure out which loans are available to you.
If you think your score isn’t where it needs to be, with a little work, you can improve it to get a more affordable personal loan now or in the future.
myFICO®. “What is a Credit Score?” Retrieved September 2021 from https://www.myfico.com/credit-education/credit-scores
Experian™. “Growth of Personal Loan Debt Slows Amid Pandemic.” Retrieved September 2021 from https://www.experian.com/blogs/ask-experian/research/personal-loan-study/
Equifax®. “When Late Payments Show on Credit Reports.” Retrieved December 2021 from https://www.equifax.com/personal/education/credit/report/when-late-credit-card-payments-post/
Experian™. “2020 Consumer Credit Review.” Retrieved September 2021 from https://www.experian.com/blogs/ask-experian/consumer-credit-review/