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Credit scores generally range from 300 to 850, with 300 considered “bad” and 850 considered “exceptional”. Fortunately, a perfect credit score of 850 is not necessary for most people when it comes to approving personal loans or credit cards. But there are other guidelines and requirements that you should be aware of before applying for a personal loan.
Below, Select explains what a personal loan is, why your credit score matters when you apply for it. and tips to increase your chances of getting approved.
What is a personal loan and why consider one?
A personal loan is a form of credit that you can use to pay off just about any major purchase – home renovations, funeral expenses, medical bills, debt consolidation, or even unforeseen emergencies if you don’t already have a fund. emergency which can cover the cost.
Much like a credit card, personal loans earn 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 a few months to a few years. For this reason, personal loans are considered installment loans.
People may want to consider taking out a personal loan to cover an expense, as they typically carry lower interest rates than credit cards, although the rates can also be variable. You may also be able to get a personal loan that is larger than the credit limit on your credit card.
According to the 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 might save you even more money, but you will likely be subject to a shorter loan period.
Another thing to keep in mind when it comes to personal loans is that you may be charged an origination or prepayment fee if you pay off the loan before it is due. If you are new to personal loans and know that you can make your monthly payments consistently, you can opt for a loan with no set-up fees, such as a Discover personal loan.
Personal loans are also very easy to use: once you are approved for a loan, the amount goes straight to 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 one that’s right for you.
Discover personal loans
Annual percentage rate (APR)
Purpose of the loan
Debt Consolidation, Home Renovation, Wedding or Vacation
Why Is Your Credit Score Important When Applying For A Personal Loan?
There are a few things you will need before you apply for a personal loan, but the first thing you should do is take a look at your credit scores and review your credit reports. Equifax, Experian and TransUnion, the 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 as to whether they think you will be a responsible borrower who will pay off the loan on time and in full.
“Lenders want to ask, ‘If I lend you money, will you pay me back?’ Said Jim Droske, president of Illinois Credit Services.
In addition, the better your credit, the more likely you are to get favorable terms, such as lower interest rates, on your loan. You can use a number of services to check your Equifax and TransUnion scores, 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
What credit score do you need for approval?
For the most part, the minimum credit score required for a personal loan approval will depend on the lender. Some lenders will tell you up front what their minimum requirements are. Payoff Personal Loan, for example, requires a FICO score of 640 or higher for approval.
While lenders can approve consumer loans with a wide range of scores, terms are likely to be better for those with higher scores.
“If you have a credit score of 760, they’ll give you different terms than if you have a credit score of 580,” says Droske. “If you have a credit score of 580, 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 rating usually means you can be approved for lower interest rates and better loan terms.
But even if 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 on how whose loan you would like to use.
“Before several different lenders deal with your credit, ask them if they have a credit score requirement and what it is,” Droske says. “You can also ask which scoring model they are using 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 conduct a series of inquiries. You can use a loan comparison tool, like the one below, to compare multiple loan offers without impacting your credit score.
The tool is provided and powered by Even Financial, a search and comparison engine that connects you with third party lenders. Any information you provide is transmitted directly to Even Financial. Select does not have access to any of the data you provide. Select can receive an affiliate commission on partner offers in the Even Financial tool. The commission does not influence the selection in the order of the offers.
Once your loan is approved, all you have to do is sign the documents – aka “closing” the loan – and the money will be deposited into your account and ready to be used.
Can I still get a personal loan if I have bad credit?
If your credit score is low and you’re worried that it might prevent you from getting a personal loan, here’s the good news: Some lenders will still help you borrow money.
Just keep in mind that while you may be approved for a personal loan with a low credit score, it is likely that lenders will charge you higher interest rates, origination fees, prepayment fees. and other costs. It is therefore a good idea to really look for a lender who will offer the best terms. You want to make sure you don’t take out a loan from a company that
Upstart, 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 a feel for the APR you would pay on your loan. This tool only results in an “indirect investigation” on your credit report, so it will not impact your credit score. However, once you apply for a loan, the lender will do a “full investigation” of your credit and your score may be affected. Inquiries are made each time you apply for a new line of credit.
Upstart is a lender on Select’s list of best personal loans that are best for bad credit.
What can you do to increase your chances of getting approved?
If you’re worried that your credit score isn’t quite where a lender wants it approved, there are a few things you can do to improve your credit score, so you can walk away with the personal loan. which has the most advantageous rates and conditions.
Continue to pay off 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 is 35% of your credit score).
Pay off as much of your existing debt as you can. Lenders want to make sure that you don’t take on more debt than you can afford, and your debt-to-income ratio can give clues to how much your debt is compared to the money you make. A high debt 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.
At the end of the line
Personal loans can help you cover large expenses without having to pay as much interest compared to other forms of credit. Your credit score is a critical part of getting a personal loan approved. And while the minimum credit score required for approval varies by lender, taking small steps to maintain a healthy credit rating can get you closer to approval and more favorable terms.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.