These days, the need for a personal loan is one that many people share. Job loss, medical emergencies, and sudden repairs can blow up your monthly budget and leave you in debt. And if you have a low credit score it may be difficult. Read on to learn more about what credit score is needed for a personal loan.
When it comes to finding money quickly, a personal loan could be one of the best options for you.
In this post, we’ll talk about what credit score is needed to qualify for a personal loan. You’ll also learn how you can hit that number to get the relief you need.
What is a Personal Loan?
A personal loan is an unsecured loan, meaning you don’t need collateral (real property like your car or your home). These loans are issued by a bank or other financial institution, like a credit union or private loan lender.
A personal loan generally ranges from $1000-$10,000 and is paid back in monthly installments over 2-6 years.
People tend to get personal loans for the things they otherwise wouldn’t accumulate savings for and pay back relatively soon. For example, a person will get a personal loan to help them rebuild after the fallout from a financial crisis. Life plans can sometimes jump the rails, and you need a hand to get things back on track. This is why many personal loans help with financial reorganizing, like debt consolidation. Personal loans are also useful for covering one-time or infrequent expenses, like big vacations, auto financing, and weddings.
With fixed interest rates and reasonable terms, a personal loan is a safe option for those who need money quickly. Unlike the varied repayment terms of credit cards, personal loans are paid in installments that are the same every month. Additionally, there are a much better options than a payday loan online, which have tight repayment schedules and complicated loan terms. These things usually result in loan renewals and additional fees on top of the accrued interest.
Once you’re approved, the lender will deposit funds within anywhere from a day to a couple of weeks.
Your lender’s priority is to give loans to individuals who can pay back the principal and interest-after all; that’s how they make their money. Personal loans are provided based on the strength of a borrowers’ relationship with money. So your best bet for getting the personal loan you need will rely heavily on one thing: your credit score.
What Makes Up Your Credit Score?
Your credit score is a rating that an interested third party—particularly a lender or creditor—views to determine your overall creditworthiness. Your score is a risk assessment that answers the most critical question: Will you be able to make payments?
Anyone who has rented a home, bought a car, or gotten a credit card knows that your score matters. However, not everyone understands credit reports, where they come from, or how their credit score is determined.
Overall, the higher your credit score can get, the better. People with higher credit scores can get access to credit options, like credit cards and personal loans, that come with better interest rates. On the other hand, having a low credit score or no credit history means that interest rates will be higher to offset the risk to the lender.
Your credit score is determined by credit reporting bureaus, which are data collection agencies that gather information about your credit from the lenders you owe. The three major Credit bureau companies reporting credit scores and issuing credit reports today are Experian, Equifax, and TransUnion.
With the data they collect, these companies evaluate your financial life. Credit scores are calculated based on the factors listed below, along with the impact that they have on your credit score (in percentages):
Payment History (35%)
Your lender is most concerned about you paying them back on time, and the best way to determine that is by reviewing your payment history—the record of how you’ve paid bills in the past. This is why you have to get used to paying your bills on time (or even earlier in your billing cycle).
Credit Utilization (30%)
Credit utilization is a measurement of how much of your available credit you are using.
For example, if you had a $200 balance on a credit card with a $1000 limit, your credit utilization would be 20%. Which, by the way, is an incredible rate. Try to keep your utilization on your credit card at or around this number (but no more than 30%).
Credit History (15%)
A more extended history of accounts provides valuable information about how you spend your money. If you can, establish credit early; a long credit history that details a pattern of borrowing money (and paying it back on time!) will boost your credit score.
New Credit (10%)
Suppose you open many new accounts—particularly a credit card account—in a short period. In that case, you can hurt your credit by sending a signal to other potential lenders that you are in some financial trouble.
Credit Mix (10%)
A variety of good-standing accounts displays that you have experience managing different types of credit. Provided that you have other information to determine your credit score, this factor bears the least amount of weight on your credit score.
After reviewing all of these factors, the bureaus report a version of your credit score called a FICO score. FICO scores are used to determine virtually all of the lending decisions in the United States.
A FICO score ranges from 300 to 850. Here is a breakdown of their range:
- 300-579: Poor Credit
- 580-669: Fair Credit
- 670-739: Good Credit
- 740-799: Very Good Credit
- 800-850: Excellent Credit
About 20% of people in the United States have poor credit. And many of them are not only living with bad credit but are also unaware of the opportunities available to help them improve their credit score and spending habits.
Boost your Credit
Remember, a personal loan is secured by your Creditworthiness alone, so knowing everything you can about your FICO score—and how you can maintain a good one—is the key to getting the loan you need. If you can, consider taking some time to boost that FICO score before applying for your loan. Some ways to do this include:
- Make on-time payments on all your bills. Show lenders that you can make reasonable payments and manage responsibility.
- Pay down the debt you already have. The less obligation you have, the more attractive you are to new lenders. And double up on monthly payments and pay early in the billing cycle if you can.
- Don’t create any more debt. Aside from the loan that you need right now, don’t look for other lenders for an additional loan or make another bill for yourself. For example, don’t get a new credit card!
- Dispute Credit Report Errors. Once you have access to your credit report, you can see who claims you owe them money. If an unfamiliar creditor on the list or a settled account is listed as outstanding, contact the credit bureaus—there are instructions on how to file a dispute on each of their websites.
Any effort you make to improve your FICO score could help you qualify for a loan. If your credit score is low, incorporate the above tactics today; even if they don’t help right now, they will improve your score, and ultimately your future financial options.
How Do I Get a Personal Loan?
Once you have a handle on your FICO score, you can focus on the specifics of your loan and start deciding what kind of lending path you want to take.
The most important thing to consider is deciding how much money you want to borrow. When determining your loan amount, you’ll need to do a little bit of time traveling.
And no, we don’t mean in a tricked-out DeLorean with Michael J. Fox. Yes, we know how cool that would be.
Securing a personal loan is not just about paying back the loan amount. Every loan will come with some form of interest attached to it, which means that you will always pay back more than you borrowed in the future—it depends on your interest rate. So think about where you will be financially in the middle of paying back your loan. Will you be able to make the payments on time every month? Can you afford these payments along with all your other bills?
Keeping your loan amount limited to only what you need is a smart move; that way, you aren’t paying interest on money that you don’t need. But, if you don’t borrow enough, you may have to get another loan with a higher interest rate to cover you. You’re going to live with this debt for a while, so make sure you can do so as comfortably as possible by borrowing only what you can repay.
Other things that you need to consider when choosing a loan are:
Fees and Penalties
Take a good, hard look at what can happen to your loan amount if you miss any payments or pay late. Be aware of the fees for late or missed payments. Small fees here and there can add up.
Type of Interest
A loan’s interest is the “cost” of borrowing the money you need. Lots of personal loans offer lower interest rates that are fixed, which means that the rate will stay the same throughout the life of the loan. However, some loans have variable interest rates that respond to the market. Your credit score is a significant factor in determining what type of interest is available to you.
Loan Terms
Loan terms detail how long it is going to take for you to repay your loan. Knowing the full extent of your loan terms and exactly how long you’ll be in debt is critical for any long-term planning.
Prepayment Penalties
We all know that late payments can result in added fees, but did you know that you can get penalized for paying off a loan earlier than expected? Since lenders offer loans to profit off the interest on every monthly payment, they will make less money if you pay them back in four or five years instead of six years.
So, What is the minimum credit score I need for a personal loan?
Credit score requirements will always vary from lender to lender. Additionally, your chances of getting loans with financial institutions that you already do business with (like your bank or credit union) will help credit decisions lean a little more your way.
However, as with most determinations involving your financial life, your loan is going to come down to how well you have dealt with debt in the past, which means that your credit score is the make-or-break factor.
Personal Loans & Credit Scores
While it’s possible to get some loan lenders to issue loans to borrowers with a lower credit score, lenders are more likely to distribute large, unsecured personal loans to people with a minimum credit score of at least 600-640. Those with credit scores of 670 or above have an even higher chance of qualifying for personal loans with lower interest rates than those with minimal approval ratings.
Even if your credit score is good enough to qualify for a loan, your credit score can benefit from consistent care and attention. If your score is excellent, then maintain it by making repayments on your new loan on time and keeping your credit utilization on any other line of credit you have very low. If you need to improve your credit score, use the credit boosting tips we talked about here. Often, people discover that all it takes to maintain good credit is staying aware of how your spending habits and financial responsibility affect the ever-important three digits that make up your FICO score. When you know better, you do better.
One More Thing: Know your Rights
While applying for a personal loan can have its challenges, the process should always be open to everyone. Below are some details on some of the protections surrounding the lending process.
Fair Credit Reporting Act
Under the Fair Credit Reporting Act, you have the right to access your FICO score and your full credit report. There are many apps and websites available to assist in credit repair. And each major credit bureaus can provide you with your FICO score. If you have bad credit (or just are assuming that you have bad credit), do some research, so you know exactly where your FICO score stands.
Equal Credit Opportunity Act
Fortunately, the Equal Credit Opportunity Act (ECOA) bans discrimination regarding the opportunity to secure loans and other types of credit. Financial institutions cannot make credit decisions based on a borrower’s race, gender, religion, marital status, national origin, or age.
In addition to personal loans, the ECOA covers credit cards, student loans, home loans, and small business loans for entrepreneurs.
The Bottom Line
Applying for a personal loan can be the right decision for you and your financial situation. No matter how much we may try to plan and prepare for the tough times, financial difficulties can get the best of us. With millions of people living so close to a state of economic instability every day, the decision to take a personal loan is a reality that may affect you at some point in your life—if not right now.
If you qualify for a loan, take every opportunity to understand the nature of this binding agreement. And most importantly, spend as much time as you can researching and comparing interest rates, fees, and all the other details that involve your loan. The help you’re looking for by getting a loan should help you fix the money problems you have now, not create new ones that you’ll have to fix later.
Every financial decision you make affects all the others after it. A personal loan can help you today, but you also need to educate yourself on how its cost will affect your tomorrow.
References:
https://www.consumer.ftc.gov/articles/0347-your-equal-credit-opportunity-rights
