Personal loans are an incredibly versatile financial product. Unlike other installment loans like auto loans or mortgages, personal loans do not have a specific purpose that you need to use them for.
Personal loans come in all shapes and sizes and term lengths for almost any purpose you could imagine. But, just like with any lending product, personal loan providers check credit scores before loan approval.
Personal Loans and Your Credit Score
Personal loans don’t have an overarching minimum credit score requirement as there are so many different types of personal loans and personal loan lenders. The minimum required credit score fluctuates depending on the lender and the loan type. There are loan options available for individuals with a fair credit score, excellent credit, and even poor credit.
That being said, you will have far more personal loan options to choose from and better annual percentage rates the higher your credit score is. The good news is that it is possible to raise your credit score significantly through loan repayment.
So even if you need to pay a higher interest rate for fair credit loans, you could raise your credit score enough to qualify for further lending options with stricter minimum credit score requirements.
Why Do Lenders Care About Your Credit Score?
The credit reporting and scoring system was established to help lenders measure creditworthiness. Every time you apply for a loan or a credit card, you are authorizing the lender to pull a copy of your credit report. Checking credit scores allows lenders to avoid unnecessary risk or adjust interest rates to compensate for a high-risk borrower.
A lender knowing what they are getting into before entering a loan agreement is necessary for the proper functioning of any financial institution. Lenders care about your FICO credit score because they could lose money if they grant loan approval to the wrong person.
What Determines Your Credit Score?
A further understanding of how your credit score is determined might shed light on why they are so vital to the qualification process for personal loans. Your credit score is calculated using the information provided in your credit report. The FICO credit score is the credit scoring model widely used by most lenders.
Credit scores are three-digit numbers ranging from 300 to 850. Your number is calculated using five categories of information provided by the credit bureaus that compile your credit report. Each category – payment history, the amount you owe, credit history, credit mix, and new credit – accounts for a percentage of the calculation of your credit score.
Payment History
Your payment history makes up for the most considerable portion of your credit score at 35%. All the monthly payments you’ve made on your existing debt, whether late or on time, are included in your payment history. A significant amount of late and missing monthly payments will result in a lower credit score.
Amount You Owe
The total amount of debt you owe – including loan amounts and credit card balances – takes up 30% of your credit score calculation. This metric includes your credit utilization ratio, which compares the debt you owe to your total credit limit.
Length of Credit History
The length of your established credit history is worth 15% of your credit score, accounting for the average age of your credit accounts and other debt.
The older your credit history is, the more favorable you look to personal loan lenders who look for borrowers with experience keeping an account in good standing for an extended period of time.
New Credit
Every time you get a new credit card or personal loan, it will appear as new credit on your credit report. Additionally, even unsuccessful credit card or personal loan applications will appear as a hard inquiry on your credit report.
New credit makes up 10% of the calculation of credit scores. Too many hard inquiries or new accounts opened within a short period of time will have a negative impact on your credit score.
Credit Mix
The variety of existing debt you have accounts for 10% of your credit score. The goal is to have a healthy mix of varying types of credit – personal loans, credit cards, auto loans, retail accounts – so that your debt is well balanced.
Minimum Credit Score Requirement for Personal Loans
While there is no set minimum credit score requirement for personal loans, most lenders, including those who specialize in Subprime lending, want borrowers to have credit scores of at least 550. Your personal loan options become more varied for fair credit borrowers and even more so for those with excellent credit.
Bad Credit Score: 579 and Below
Anything below 580 is considered a poor credit score. While you will find multiple lenders who are willing to approve bad credit borrowers for a personal loan, you will likely be charged much higher interest rates and be unable to qualify for a large loan amount.
A secured loan may be easier to obtain for borrowers with poor credit as the collateral can compensate for the credit risk. But an unsecured personal loan for bad credit like a payday loan might not be worth the interest rate costs. It might be a good idea to attempt to raise your credit score until you can qualify for loans for fair credit.
Fair Credit Score: 580 to 669
A score between 580 and 669 is considered a fair credit score. You will have significantly more options in personal loans for fair credit than you would with bad credit.
A fair credit lender will offer better annual percentage rates than bad credit lenders. However, the interest rate will still be more costly than your typical personal loan, so it’d be wise to pay off a fair credit loan early.
Personal loans for fair credit borrowers tend to be a lower loan amount than is possible with a higher credit score. The minimum loan amounts and maximum loan amounts are typically smaller for personal loans with a lower minimum credit score requirement.
Good Credit Score: 670 to 739
A good credit score ranges from 670 to 739. With a good credit score, you will be able to qualify for lower interest rates and significantly higher loan amounts.
Since a good credit score will get you access to a wider variety of options, it’s vital that you do some comparison shopping on loan amounts and personal loan rates so you can find the best deal for you.
Excellent Credit Score: 740 and Above
A score over 740 is considered an excellent credit score and will give you access to the best personal loans available. If you have a solid enough debt-to-income ratio, this credit score should allow you to qualify for whatever loan amount you need with enviable interest rates from the best personal loan lenders.
Options for Fair Credit Personal Loans
Let’s further explore personal loans for fair credit and what options are available to someone with a 580 credit score. If you are willing to take on a higher interest rate, you will still be able to find personal loans where fair credit is satisfactory as a minimum credit score.
Peer-to-Peer Lending
Peer-to-peer lending allows individuals to use an online platform to forego turning to a financial institution to borrow money. With peer-to-peer lending, investors are matched with borrowers to provide a personal loan. Sometimes a personal loan may even have multiple lenders funding it.
Peer-to-peer lending platforms don’t have a set minimum credit score. Borrowers with fair credit have a much better chance of being approved for a P2P personal loan. However, it is essential to note that P2P personal loans tend to have a higher interest rate and more origination fees than more traditional personal loans.
Secured Loans
It could be significantly easier to qualify for a secured loan with fair credit than for unsecured personal loans. A secured loan will tend to have a more flexible minimum credit score requirement compared to unsecured loans because they allow you to borrow money against collateral.
Collateral decreases the risk for a lender and could help you get a lower interest rate or higher loan amount. A Home equity loan is a common type of secured personal loan that uses your house’s equity as collateral.
Subprime Personal Loans
You will be able to qualify for subprime personal loans like payday loans with a fair credit score, but you need to be wary of the interest rate you might be charged. Finding online no credit check loans may be incredibly tempting if you are concerned about your fair credit score hurting your chances of approval.
We advise you always do the math on the interest rates, origination fees, and monthly payments to be sure you can afford to pay back the loan amounts according to the repayment terms before you sign the loan agreement.
Use a Cosigner
You may be able to qualify for personal loans that require a minimum credit score higher than your fair credit by applying with a cosigner. Having a cosigner on your personal loan could allow you to access larger loan amounts, better repayment terms, and a more affordable interest rate.
Your cosigner can be any family member or close friend with a good credit history and can meet the minimum credit score. It is important that your cosigner fully understands that they will be legally responsible for the monthly payments if you default on your personal loan.
Five Ways To Increase Your Fair Credit Score
If you qualify for a personal loan with fair credit, making your monthly payments on time could help you increase your credit score over time. Additionally, having a new type of account on your credit history could improve your credit mix.
Completing the debt payment obligations on personal loans, even those for fair credit, can be an excellent way to build credit that has been damaged.
Here are a few other ways to improve your score through responsible credit usage, so you don’t have to think twice about the minimum credit score before applying:
- Decrease Your Credit Utilization
Paying off some of your debt is a great first step in improving your credit score. Decreasing your credit utilization ratio by paying off a few credit cards and leaving the accounts open could do wonders for your fair credit. Most financial experts suggest a credit utilization ratio under 30%.
Many lenders look for a low utilization ratio as a sign of responsible credit usage. Doing this will minimize your debt-to-income ratio as well, which should elevate your overall financial health.
- Become an Authorized User
If you do not have the minimum credit score necessary to get a credit card or a personal loan, you could have your spouse, a family member, or a close friend add you as an authorized user on one of their credit cards.
This could give your fair credit a substantial boost overnight. The account will be reported to the credit bureaus, and you can benefit from every monthly payment made on time as if it were your own.
- Get a Secured Credit Card
Another option for building credit is a secured credit card. With a secured credit card, you put down a cash deposit for a line of credit that can help you improve your credit score.
Every monthly payment you make will show up on your credit report building your payment history until you reach the minimum credit score necessary to apply for traditional credit cards and personal loans.
- Check Your Credit Report Often
Make a habit of checking your credit report regularly so that you can catch any errors and fix them immediately. If you don’t check your credit report often enough, inaccuracies could prevent you from qualifying for personal loans you might have been approved for otherwise.
Additionally, familiarity with your credit report could enlighten you on what needs to be improved to go from a fair credit score to an excellent credit score.
- Practice Patience
Last but not least, improving your credit score requires patience. You might not see results overnight, but if you put in the necessary effort, you will see the fruits of your labor in time.
After taking some time to build your fair credit back up, you’ll find many lenders willing to work with you to meet your funding needs.
References:
How to Get a Personal Loan With Fair Credit (580-669 Credit Score)