Getting a personal loan typically requires a credit check, so your credit score is important. While lenders vary in their requirements, you're more likely to get the best loan terms if your score is in the "good" category or higher, meaning at least 670. But even if you have only a "fair" score, which starts at 580, you may be able to obtain a personal loan from some lenders.
- Lenders set their own minimum credit scores for personal loans.
- In general, a score of 670 and up will entitle you to the best interest rates and other terms.
- Some lenders offer personal loans to borrowers with lower scores, although usually at less favorable terms.
- If your credit score isn't high enough, there are ways to improve it.
How Credit Scores Work
When you apply for a loan or other form of credit, the lender is likely to look at both your credit reports and credit score in deciding whether to approve your application and, if so, what terms to offer you. That can include the interest rate you'll have to pay.
Your credit score isn't included in your credit reports, but is based on the information in them. The three main credit reporting agencies (Equifax, Experian, and TransUnion) receive information from your creditors and compile it into an individualized report on you. Your score might vary slightly depending on which agency or agencies your creditors report to.
FICO scores are based on five categories, each of which has its own weighting. Here's how they break down:
- Payment history (35%): This category includes whether you make your credit payments on time and pay at least the minimum amount.
- Amounts owed (30%): This category not only looks at how much you owe in total but how much of your available revolving credit you're using at any given time, referred to as your credit utilization ratio. Generally speaking, the lower your ratio, the better.
- Length of credit history (15%): How long you've had credit, in addition to the age of specific accounts. Older is better.
- Credit mix (10%): This category takes into account the different types of credit you have, such as installment loans (like personal loans) or revolving credit (like credit cards). For credit score purposes, it's good to have more than one type.
- New credit (10%): Opening a lot of accounts in a short period of time could negatively affect your credit score. Lenders may take that to mean that you're financially overextended or headed in that direction.
VantageScores are based on similar categories but weighted a little differently.
Personal Loan Options for Fair or Poor Credit
While you're more likely to get a better interest rate with a higher credit score, it’s still possible to obtain a personal loan if you have fair (or sometimes even poor) credit.
The following ranges, from the credit bureau Experian, can give you an idea of whether your credit is considered good, fair, or poor:
- Exceptional: 800–850
- Very good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: Below 580
If your credit is at least fair, there's a good chance that you'll be able to get a personal loan, as long as you don't have too much other debt and are willing to pay a higher interest rate.
One option is to check with a credit union, if you belong to one, to see if it offers to fair- or poor-credit loans. Another is to look for a lender that will issue you a personal loan if you put down collateral (a secured loan). You might also be able to find a lender that will let you take out a loan with a co-borrower or co-signer with good credit.
In addition, there are some lenders that offer emergency loans for bad credit.
How Personal Loans Affect Your Credit
A personal loan has the potential to affect your credit score both positively and negatively.
Depending on how you use the loan, its positive effects might include:
- Build your payment history: When you make on-time payments, your lender reports them to the credit bureaus, potentially improving the most important factor in your credit score.
- Lower your credit utilization: Installment loans aren't included in your credit utilization ratio, but if you use a personal loan to pay off some of your credit card debt, you could see an improvement in your score.
- Credit mix: If all the credit you have been using up to this point is revolving credit (such as credit cards), then adding an installment loan (like a personal loan) can give your score a small boost.
On the other hand, a personal loan can have a negative impact on your credit if you aren't careful. First, even applying for a loan can trigger a hard inquiry on your credit report and cause your credit score to dip slightly. Far more important, if you don't make your payments on time, it could result in a much lower credit score.
Other Factors in Qualifying for a Personal Loan
While your credit score is a major part of qualifying for a personal loan, it's not the only factor that a lender will consider. Each lender has its own criteria, but in general, there's a good chance that it will also look at your income and employment history, cash flow, and how much debt you already have.
If your income isn't sufficient to make monthly payments, or if you have a high debt-to-income (DTI) ratio, then you might not qualify for a personal loan, even if you have reasonably good credit. Additionally, if it looks like you have a lot of delinquent accounts or a history of missed payments, it might be harder to get a loan if you don't provide some type of collateral. That will also be reflected in your credit score.
Finding the Best Personal Loan for You
When comparing different personal loan options, you'll want to look at a number of things:
- Interest rate: The higher the interest rate, the more you'll pay each month and overall. Try to get the lowest interest rate possible.
- Fees and penalties: Many personal loans come with origination fees that can add to their cost. You might pay a higher origination fee if you have poor credit. Additionally, make sure there are no prepayment penalties before you sign the loan agreement, just in case you want to pay the loan off early.
- Term length: Figure out how long you might need the loan. It's not uncommon to find personal loans with terms ranging from two to seven years. A longer term might mean more manageable monthly payments, but you can expect to pay more overall in interest.
- Amount needed: Make sure your lender isn't offering more or less funding than you actually need. Also, if you're trying to secure a larger loan amount, determine whether you'll have to put up collateral. Any asset you offer as collateral, such your home or car, is at risk if you're unable to repay the loan.
Consider shopping three to five different lenders to see which one might offer terms that work best for you. Many lenders offer pre-qualification, which can give you an idea of what to expect without affecting your credit score. You might want to start with a bank or credit union where you already have accounts.
How Can You Find Out Your Credit Score?
You may be able to obtain your credit score free of charge from your bank or credit card issuer. There are also websites for free credit scores. Bear in mind that there are numerous credit scoring models—not just FICO and VantageScore, but multiple variations of each. So whatever score you obtain may not be identical to any others you have.
How Can You Obtain Your Credit Reports?
Federal law entitles you to free copies of your credit reports from each of the three major bureaus—Equifax, Experian, and TransUnion at least once a year. You can obtain them all at the official website for that purpose, AnnualCreditReport.com. If you find errors in your report, you have a right to challenge them.
How Long Does It Take to Improve Your Credit Score?
While negative information can remain in your credit reports for up to seven years (and 10 in some cases), you can gradually improve your score by consistently paying your credit bills on time and reducing your credit utilization ratio. Two ways to do the latter are: pay down your existing credit accounts and/or open a new revolving account to increase your available credit. The major credit bureaus say you may begin to see a rise in your score starting in 30 to 45 days.
The Bottom Line
The better your credit score, the more likely you'll be able to get a personal loan with good terms. So, it's worth checking your score before you apply and, unless you're in a rush, seeing if you can improve your score before you do.