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Credit scores generally range from 300 to 850, with 300 being considered “bad” and 850 considered “exceptional”. Fortunately, a perfect 850 credit score isn’t necessary for most people when it comes to approving personal loans or credit cards. But there are other guidelines and requirements you need to be aware of before applying for a personal loan.
Below, Select explains what a personal loan is, why your credit score matters when applying for one. and tips to increase your chances of approval.
What is a personal loan and why might you consider one?
A A personal loan is a form of credit you can use to pay for just about any major purchase – home renovations, funeral expenses, medical bills, debt consolidation, or even unexpected emergencies if you don’t already have one. emergency fund that can cover the cost.
Much like a credit card, personal loans accrue interest while you pay off the balance. But unlike credit cards, personal loans usually have terms that allow you to repay equal amounts over a period of months to years. For this reason, personal loans are considered installment loans.
People may consider taking out a personal loan to cover an expense, as they generally carry lower interest rates than credit cards, although rates can also vary. You might also be able to get a personal loan that’s larger than your credit card credit limit.
According to Federal Reserve, the current average APR for a two-year personal loan is 9.58%, while the average APR for a credit card is 16.30%. However, using a credit card with a 0% intro-APR period could save you even more money, but you’ll likely be subject to a shorter loan period.
Another thing to keep in mind with personal loans is that you may be charged origination fees or prepayment fees if you repay the loan before the end of its term. If you’re new to personal loans and know you can still make your monthly payments, you might want to opt for a loan with no origination fees, such as a Discover the personal loan.
Personal loans are also very simple to use – once you are approved for a loan, the amount is paid directly into your checking account and you can start using the money as you see fit. Read our list of the best personal loans to find the right one for you.
Annual Percentage Rate (APR)
Purpose of the loan
Debt consolidation, home improvement, wedding or vacation
Why is your credit score important when applying for a personal loan?
You’ll need a few things before you apply for a personal loan, but the first thing to do is take a look at your credit scores and review your credit reports. EquifaxExperian and Trans Unionthe three major credit bureaus, each report a different score based on different scoring models.
Your credit history and credit scores are important because they provide lenders with clues to determine if they think you will be a responsible borrower who will repay the loan on time and in full.
“Lenders want to ask themselves, ‘If I lend you money, are you going to pay me back?'” said Jim Droske, president of Illinois Credit Services.
Plus, the better your credit, the more likely you are to get favorable terms — like lower interest rates — on your loan. You can use a number of services to check your scores Equifax and TransUnion, which use the VantageScore model, or use Experian to check your score based on the FICO 8 model. Note that the FICO 8 model is used in about 90% of decisions loan in the United States.
In most cases, the minimum credit score required for approval of a personal loan will depend on the lender. Some lenders will tell you upfront what their minimum requirements are. Personal loan repaymentfor example, requires a FICO score of 640 or higher for approval.
Although lenders can approve consumer loans with a wide range of scores, terms will likely be better for those with higher scores.
“If you have a 760 credit score, they’ll give you different terms than if you have a 580 credit score,” Droske says. “If you have a 580 credit score, a lender can still give you a loan, but they will adjust the terms accordingly because you will be considered a riskier borrower.”
Having a higher credit score usually means you can be approved for lower interest rates and more favorable loan terms.
But while your credit score is an important piece of the puzzle, keep in mind that you will also need to provide other crucial information such as your annual income, employment status, social security number, and details about how you want to use the loan.
“Before several different lenders manage your credit, ask them if they have a credit score requirement and what it is,” says Droske. “You can also ask what scoring model they use so you can see for yourself if your credit score is currently within the required range.”
Another option is to check with different loan providers to see if you will get pre-approved for a loan, before asking them to answer many inquiries. You can use a loan comparison tool, like the one below, to compare multiple loan offers without affecting your credit score.
Once your loan has been approved, all you have to do is sign the documents – aka “close” the loan – and the money will be deposited into your account and ready to use.
If your credit score is at an all-time low and you’re worried it’ll get in the way of getting a personal loan, there’s good news: some lenders will still help you borrow money.
Just keep in mind that even though you may be approved for a personal loan with a low credit score, lenders are likely to charge you higher interest rates, origination fees, prepayment fees and other charges. So it’s a good idea to really shop around to find a lender that will offer the best terms. You want to make sure you don’t take out a loan from a company that
Reached, for example, will not charge you a fee for prepaying your loan. And the company has a rate checker tool that lets you enter your information to get an idea of the APR you’d pay for your loan. This tool only performs an “informal inquiry” into your credit file, so it will not impact your credit score. However, once you have actually applied for the loan, the lender does a “serious investigation” into your credit and your score may be affected. Serious inquiries are performed each time you apply for a new line of credit.
Upstart is one of the lenders on Select’s list of best personal loans that are best for bad credit.
What can you do to increase your chances of approval?
If you’re worried that your credit score isn’t quite what a lender wants it to be for approval, there are a few things you can do. to improve your credit score, so you can walk away with the personal loan that has the most favorable rates and terms.
Continue to repay your debts regularly and on time. Skipping a payment or making a late payment can be a red flag for lenders. Plus, making monthly payments on time can actually help boost your credit score (payment history accounts for 35% of your credit score).
Pay off as many existing debts as possible. Lenders want to make sure you don’t take on more debt than you can afford, and your debt-to-equity ratio can give clues to how much you owe compared to the money you earn. A high debt-to-income ratio is generally considered to be around 36%. You can reduce the amount of your existing debt by slightly increasing the amount you pay into your balance each month or by making additional payments.
Personal loans can help you cover major expenses without having to pay as much interest as other forms of credit. Your credit score is an essential part of getting approved for a personal loan. And while the minimum credit score required for approval varies by lender, taking small steps to maintain a healthy credit score can bring you closer to approval and more favorable terms.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.