A higher credit score means you're more likely to qualify for a personal loan and will be offered a lower interest rate. You'll have the best chance of success if your score falls in the Good range of credit or higher – but it may be possible to get a personal loan with lower scores.
The minimum credit score you need for a personal loan will likely depend on your lender. Read on for full details plus tips and tricks to improve your credit before you apply for a personal loan.
What Is a Personal Loan?
A personal loan gives you a lump-sum payment that you can use for just about anything you need, such as debt consolidation, a vacation, a wedding, house remodeling, or car repairs.
The typical loan amount is about $1,000 to $15,000. You can choose your term from a possible range of 12 to 48 months and then you make monthly payments until the loan is paid off in full.
What You Need to Qualify for a Personal Loan
If you have great credit, it will probably be easy for you to get a personal loan. But your credit score isn't the only thing a potential lender looks at when considering your application.
You might be able to find a lender who will look at all your other strengths if your credit score isn't the best at the moment. For example, you might find your local credit union is more understanding and flexible than a regular bank.
The three credit reporting agencies use various formulas to come up with your credit score. There are also different credit scoring systems with categories from Poor or Very Poor (starting at 300) to Excellent or Exceptional (up to 850).
So, what credit score is needed for a personal loan?
If your score is Good or higher, your personal loan will likely be approved.
A Good FICO credit score is 670 to 739 while a Good Vantage score is 661 to 780.
If your score is Fair or Poor, you may still be able to get a personal loan but you'll pay a higher annual percentage rate (APR) and you may get fewer choices of terms.
Let's say your credit is less than perfect but you have a steady job and a good income. As long as you can verify your earnings, your lender might still be able to approve your personal loan. Just gather these documents before you apply:
Tax Returns (W-2 or 1099)
Bank Statements (Personal and Business)
Details about your Employer or Business
Monthly income limits the dollar amount of unsecured loans eligible from the credit union.
Your debt-to-income ratio (DTI) is another measure of your creditworthiness. It tells your lender how much you spend on debt compared to how much you earn. Here's how to calculate your DTI:
Add up all your monthly debt payments (credit cards, loans, and any other payments to creditors).
Divide your total debts by your pre-tax income from all sources (wages, salary, bonuses). Dividends are not used for income..
The lower your DTI the more likely you will be approved for the amount and terms you request. A DTI exceeding 40% is less favorable.
Your Character and Assets
Many personal loans are unsecured, which means you don't need to provide any collateral like a car, house, or funds in your savings account.
But if your credit score isn't ideal, your lender may be willing to consider any assets you have and your personal standing and character as part of a recommendation for a personal loan.
Ways to Improve Your Credit
It's a good idea to work on improving your credit score before you apply for a personal loan. Each time you move into a higher credit range, you'll improve your chances of being approved. Plus, you'll qualify for lower rates, better terms, and maybe even fewer fees.
Here's a roundup of the best ways to build or restore your credit:
Always make your loan and credit card payments on time, and be sure to pay your utility bills so they never go to collection.
Work out a budget so you can pay down credit card debt as quickly as possible. Using less than 30% of your available credit will boost your debt-to-credit ratio, known as the credit utilization rate.
Keep your credit card account open once you've paid off the balance because the longer you've held credit, the better your credit score.
If you don't yet have a credit card, consider applying for a secured credit card with a low limit. Make small purchases and pay your balance in full each month to get the most benefits to your credit score.
Avoid applying for many different types of loan products (personal loan, home loan, credit card, auto loan) in a short time as your credit will take a hit with each application.
Over time, open a range of different types of credit accounts because the greater mix of credit you have, the better your score.
Note: Getting pre-approved for a personal loan from multiple lenders in a short time will only ding your score once, and it will soon recover once you start making regular, timely payments.
Credit Score and Personal Loans: Next Steps
A personal loan could be the difference between struggling and thriving in these uncertain times. Hopefully, this article has made it clear whether you should apply for a personal loan now or if it might be better to wait.
Maybe you're still sitting on the fence wondering if you've got what it takes to get approved. Click below for more helpful tips on applying for a personal loan and being approved!
How to Apply for a Personal Loan (& Get Approved)