Personal loans can help you tackle common financial problems: If you’re strapped for cash but have pressing financial obligations, such as a car or home repairs, or need money for some other large expense, a personal loan might be your best option.
Your credit score is one of the most important factors that lenders take into account when they consider your eligibility for a personal loan. The interest rate you receive will also be affected by your score. Find out how your credit score is determined and what loan rates you can expect.
Once you know how lenders determine your eligibility, you’ll already have a leg up on getting approved.
Why Your Credit Score Matters for Personal Loans
Banking customers who use credit cards and take out loans have credit scores. Your score is a three-digit number that tells banks how trustworthy you are as a borrower. Your credit score is also a reflection of your repayment history and debts.
Your credit score is based on your credit report, which is a detailed summary of your credit activity over the years. Information on your report is collected by the three major credit bureaus: TransUnion, Experian and Equifax. Your lenders report your repayment history to these organizations.
Credit bureaus use a scoring system based on the Fair Isaac Corporation (FICO). Your FICO score can range anywhere from 300 to 850. The better your score, the more likely you are to qualify for higher loan amounts and lower personal loan interest rates.
You can still get loans with bad credit. But if you have a low score, you might only qualify for loans for people with bad credit or bad-credit personal loans — that is, small loans with high rates.
Find Out How to: Get the Best Personal Loan Rates
What Is the Ideal Credit Score to Get a Personal Loan?
Personal loans are unsecured loans — meaning they are not backed by any sort of collateral — and their interest rates can vary wildly based on your creditworthiness. For example, the average rate for someone with a credit score between 720 and 850 ranges from 10.3 percent to 12.5 percent, but the average rate for a poor credit score — between 300 and 639 — can range from 28.5 percent to 32 percent.
For unsecured personal loans, a difference of just 50 points in your credit score can affect your interest rate by several percentage points. There is no minimum credit score for a personal loan from a credit union. Lanco Federal Credit Union in Lancaster, Pa., for example, offers the following personal loan rates based on your credit score:
- Customers with 750+ scores receive an 8.99% APR
- 700-749 scores receive a 9.99% APR
- 660-699 scores receive an 11.99% APR
- 620-659 scores receive a 15.99% APR
- If your score is under 620, your rate will be 17.99% APR
Wondering how to get a personal loan with bad credit? You can get a loan with bad credit, but it won’t be the best loan with the lowest interest rate. The minimum credit score for a personal loan approval will vary by lender, so check with the lenders you’re interested in to understand what number they’re looking for.
How Good Credit Helps You Save on Personal Loans
Raising your credit score can affect the affordability of your personal loan, saving you money on interest over time. Consider the following data from LendingTree:
- A personal loan borrower with a poor credit score who finances $10,000 for 48 months with a 21.9% APR can expect to pay $15,096.96 over the life of the loan.
- A borrower with an excellent credit score who receives a 5.99% APR will pay $11,270.40 over the life of the same loan.
In this scenario, the borrower with the higher credit score saves more than $3,800 over the course of a four-year loan.
Find Out: What Is a Good Credit Score?
Reviewing Your Credit Report
Although lenders might also consider your employment history and monthly income when evaluating your creditworthiness, your credit report can make or break loan deals. Before applying for a personal loan online or directly with a lender, get a copy of your credit report and review it thoroughly.
“There could be items you’re not aware of that are bringing down your credit rating, such as unfavorable information from someone who has the same name as you or being the victim of identity theft,” said Annie Sanchez, founder Debt Free Like Annie, a website dedicated to helping others get out of debt.
When reviewing your report, look out for information that might raise red flags for lenders. “If you have paid late, gone over 30 percent of your credit limit, closed your oldest credit cards, applied for too much credit at the same time, or stuck to only one source of credit, it’s possible that you could get denied or receive an unfavorable interest rate,” said Sanchez.
How to Raise Your Credit Score
Your credit score can change often. If your score is less than ideal, you can build healthy financial habits to improve your credit standing over time. Now that you know how to qualify for a personal loan and what goes into a lender’s decision, consider making it your priority to raise your FICO score 100 points in one year and help yourself get a personal loan with a low interest rate.
Find out the credit score needed for a personal loan at a good rate from a lender you like and aim for that number. You can also prequalify for a personal loan by filling out a personal loan application, which will show you how much money you can borrow and at what rate. One way to boost your credit score quickly is to correct errors on your credit report. You can also aggressively pay down outstanding debts and set up automatic payments so that you always pay bills on time.
With an improved score, you can take out a personal loan with a lower rate. If you take extra care to pay back your loan on time, you can improve your credit score even more.
Barri Segal contributed to the reporting for this article.