Do you need immediate access to cash? Although an emergency fund is the ideal way to cover unforeseen expenses, not everyone has it. A 2023 Bankrate survey reveals that approximately 22 percent of US adults don’t have any dedicated savings for emergencies.
Personal loans are an excellent alternative to paying for unexpected expenses. You can also use them to finance a home remodeling project, consolidate debts, or for other purposes. Most lenders don’t have restrictions on how you use a personal loan.
A personal loan can be unsecured, so you don’t have to worry about providing collateral and having your assets seized if you default. Instead, lenders rely on your credit score and history of repaying previous debts to determine eligibility.
Credit score criteria for cheap personal loans differ from one lender to another. You may find that lenders grant personal loans to consumers with diverse scores. However, those with higher credit scores are more likely to get approved for more favorable terms.
This article walks you through the importance of credit scores when getting personal loans. We’ll also discuss the minimum credit score requirements for a personal loan based on the lender you choose to work with.
The Importance of Credit Scores When Getting Personal Loans
Credit scores demonstrate your record of timely payments and how responsible you are in managing borrowed funds. It only makes sense for lenders to use them to measure the borrower’s credit risk and the likelihood of repayment.
Before submitting your personal loan application, examining your credit scores and credit reports is crucial. Doing so will give you insights into your financial standing. Likewise, it allows you to gauge the likelihood of loan approval and take proactive steps to improve your credit scores.
Every creditor establishes its own credit score range. For instance, the credit score requirements to get approved for a credit card may differ from what’s required to qualify for a personal loan. Generally, a damaged credit score can reduce your approval chances for credit cards or loans.
Let’s explore general credit score ranges and what factors contribute to a higher or lower score. Learning about them can help you qualify for the most favorable rates and terms.
Breakdown of credit score ranges
Although you may have credit scores from different consumer credit bureaus, your FICO credit score holds immense significance in lending decisions.
A FICO score is calculated using Fair Isaac Corporation’s (FICO) formula. It indicates numerical scores spanning from 300 to 850. These scores are split into the following categories according to their level:
- Excellent: 800-850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Factors that make up a credit score
There are multiple methods to calculate your credit scores. But credit bureaus use the same information on your credit report to compute your score. Below are the primary factors that can appear on your credit report and affect whether your credit score is high or low:
- Payment history reveals whether you’ve consistently made payments on your bills and other obligations on time.
- Credit utilization indicates the amount of debt you carry relative to your available credit.
- The length of credit history signifies the age of the accounts on your credit reports.
- New credit refers to the number of new credit, loan, or mortgage accounts you apply for.
- The credit mix shows the different types of credit you use, including credit cards, mortgages, and installment loans.
Different Types of Personal Loans and Their Minimum Credit Score
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There’s no universal credit score requirement for personal loans. But as mentioned, higher credit scores increase your chances of approval and help you secure a more favorable interest rate.
Knowing the lender’s requirements can help you qualify for the best rates and terms. When taking out a personal loan, borrowers have various options, including banks and credit unions, online lenders, and peer-to-peer lending platforms.
Learn about the different types of personal loans offered by those lenders and their corresponding minimum acceptable credit scores.
Traditional personal loans
With a traditional personal loan, you’ll work with a lender in person, usually at a local bank, credit union, or other brick-and-mortar location.
Banks and credit unions often require a relatively high credit score, which makes it harder to qualify. Typically, these traditional lenders prefer borrowers with good credit scores, which fall between 670 and 739.
Online personal loans
An online personal loan works the same as a traditional personal loan. But you don’t need to go to a brick-and-mortar location and spend time waiting in line to apply.
Online personal lenders can be more lenient in their credit score requirements. You may find one that will approve you even with a damaged credit score. However, the typical minimum credit score these lenders accept ranges from 560 to 660, with some demanding higher scores.
Peer-to-peer personal loans
You can obtain these personal loans from individual investors or institutions through a peer-to-peer lending platform.
Some P2P lenders might be willing to extend personal loans even when you have a poor credit score. However, expect them to charge you a higher interest rate. Applying with a credit score of at least 600 makes you a more favorable borrower for P2P personal loan lenders.
Additional Considerations When Comparing Personal Loans
Besides credit score requirements, there are other variables a borrower must consider when comparing personal loan offers. These may include, but are not limited to, the following:
Interest rates
A comparison of the interest rates by various lenders is imperative before you proceed to secure a personal loan. Depending on your credit score and additional factors the lender considers, the personal loan interest rate can vary between different lenders.
Loan term
Some lenders may offer you marginally low-interest rates. However, unreasonable loan terms may cost you more in the long run. A loan term refers to the period you will have to repay the loan, which commonly spans two to five years. A shorter loan term can lower your annual percentage rate.
Fees
Most personal loans come with additional costs, which can increase the total amount you owe. Ensure you read the fine print on your personal loan and understand the fees the lender charges. Consider lenders that restrict their processing fees regardless of the loan amount.
The Bottom Line
Getting approved for a personal loan doesn’t require a perfect credit score. However, taking action to boost your credit score is imperative to qualify for better rates and terms. Likewise, shopping with three to five lenders can be beneficial in securing the best terms and rates.
It’s also crucial to remember that credit scores are not the only thing lenders consider when approving a loan or determining an interest rate. Hence, take the time to research what other factors your chosen lenders specifically require to increase your chances of approval.