Personal loans are an incredibly versatile financial product. Personal loans, unlike other installment loans like auto loans or mortgages, do not have a predetermined use for which you must use them.
Personal loans are available in almost any combination of terms, sizes, and purposes. However, before approving a personal loan, lenders check credit scores, just like they do with any lending product.
Personal Loans and Your Credit Score
Due to the wide variety of personal loan products and lenders, there is no general minimum credit score requirement for personal loans. Depending on the lender and the type of loan, different credit scores may be needed. Individuals with fair credit, excellent credit, and even poor credit have loan options available to them.
Having said that, the higher your credit score, the greater the number of personal loan options available to you and the better the annual percentage rates. The good news is that loan repayment can significantly improve your credit score.
Therefore, even though fair credit loans have higher interest rates, you may be able to improve your credit score enough to be eligible for additional lending options with stricter minimum credit score requirements.
Why Do Lenders Care About Your Credit Score?
The purpose of the credit reporting and scoring system was to assist lenders in evaluating creditworthiness. You give the lender permission to obtain a copy of your credit report each time you apply for a loan or a credit card. By reviewing credit reports, lenders can reduce unnecessary risk or raise interest rates to offset a high-risk borrower.
For any financial institution to operate properly, the lender must understand what they are getting into before signing a loan agreement. Lenders are concerned with your FICO credit score because they stand to lose money if they approve a loan to the incorrect applicant.
What Determines Your Credit Score?
Understanding how your credit score is calculated in more detail may help you see why it’s so important for obtaining personal loans. Information from your credit report is used to determine your credit score. Most lenders use the FICO credit score as their primary method of credit scoring.
Credit scores are three-digit numbers ranging from 300 to 850. Five categories of data from the credit bureaus that create your credit report are used to calculate your number. Each factor that goes into determining your credit score, including payment history, debt, credit history, credit mix, and new credit, is weighted in percentage terms.
Your payment history accounts for the largest percentage of your credit score, or 35%. Your payment history includes every monthly payment you’ve made on your debt, whether it was made on time or late. A significant number of missed and late payments each month will lower your credit score.
Your credit score is calculated using 30% of your total debt, which includes loan balances and credit card balances. This metric compares the amount of debt you have to your total credit limit, and it includes your credit utilization ratio.
Length of Credit History
15% of your credit score is determined by the length of your credit history, which takes into account the typical age of your credit accounts and other debt.
Lenders of personal loans who look for borrowers with experience keeping an account in good standing for a long period of time will view you more favorably the longer your credit history is.
Your credit report will reflect new credit each time you obtain a new credit card or personal loan. Furthermore, any credit card or personal loan applications that are declined will show up as a hard inquiry on your credit report.
10% of credit scores are calculated using new credit. Your credit score will suffer if you open too many new accounts or have too many hard inquiries made.
10% of your credit score is determined by the different types of debt you currently have. To ensure that your debt is well-balanced, you should aim to have a healthy mixture of various types of credit, including personal loans, credit cards, auto loans, and retail accounts.
Minimum Credit Score Requirement for Personal Loans
The majority of lenders, including those who focus on subprime lending, want borrowers to have credit scores of at least 550 despite the fact that there is no set minimum credit score requirement for personal loans. For borrowers with fair credit, there are more options available to you, and for those with excellent credit, there are even more.
Bad Credit Score: 579 and Below
Anything below 580 is considered a poor credit score. While there are many lenders who will approve borrowers with bad credit for a personal loan, you’ll probably pay much higher interest rates and be ineligible for a large loan amount.
Borrowers with bad credit might find it simpler to get a secured loan because the collateral can offset the credit risk. But a payday loan or other unsecured personal loan for people with bad credit might not be worth the interest costs. In order to be eligible for loans with fair credit, it might be a good idea to try to increase your credit score.
Fair Credit Score: 580 to 669
Fair credit is defined as a score between 580 and 669. In comparison to personal loans for people with bad credit, you will have a lot more options if you have fair credit.
A lender with fair credit will provide better annual percentage rates than a lender with bad credit. A fair credit loan should be paid off early because the interest rate will still be higher than that of a typical personal loan.
The loan amount for personal loans for borrowers with fair credit is typically lower than what is possible with a higher credit score. Personal loans with a lower minimum credit score requirement typically have smaller minimum loan amounts and maximum loan amounts.
Good Credit Score: 670 to 739
A good credit score ranges from 670 to 739. You’ll be able to obtain loans with significantly higher loan amounts and lower interest rates if you have a high credit score.
You must compare loan amounts and personal loan rates because having good credit gives you access to more options. By doing this, you can find the best loan for you.
Excellent Credit Score: 740 and Above
With a score of at least 740, you have excellent credit and can apply for the best personal loans. This credit score should enable you to be approved for any loan amount you require with desirable interest rates from the best personal loan lenders if your debt-to-income ratio is strong enough.
Options for Fair Credit Personal Loans
Let’s look at personal loans for people with fair credit in more detail and see what options someone with a 580 credit score has. You can still find personal loans with fair credit as the required minimum credit score if you’re willing to accept a higher interest rate.
Peer-to-peer lending enables people to avoid going to a financial institution in order to borrow money by using an online platform instead. With peer-to-peer lending, borrowers and investors are matched to provide personal loans. A personal loan may occasionally be funded by several different lenders.
Peer-to-peer lending platforms don’t have a set minimum credit score. A P2P personal loan is much more likely to be approved for borrowers with fair credit. But it’s important to remember that compared to more conventional personal loans, peer-to-peer loans frequently have higher interest rates and more origination fees.
With fair credit, a secured loan might be much more accessible than an unsecured personal loan. Because secured loans allow you to borrow money in exchange for collateral, they tend to have lower minimum credit score requirements than unsecured loans.
Collateral lowers the risk for a lender, which may enable you to obtain a loan with a lower interest rate or a larger loan amount. A common form of secured personal loan is a home equity loan, which uses the equity in your home as security.
With a fair credit score, you can be approved for subprime personal loans like payday loans, but you should be cautious of the interest rate you may be charged. If you are concerned that your fair credit score will negatively affect your chances of approval, it may be very tempting to search for online no credit check loans.
Before you sign the loan agreement, we advise you to always calculate the interest rates, origination fees, and monthly payments to ensure you can afford to repay the loan amounts in accordance with the repayment terms.
Applying with a cosigner may help you be approved for personal loans with minimum credit score requirements higher than your fair credit. You might be able to access bigger loan amounts, better repayment terms, and a lower interest rate with a cosigner for your personal loan.
Any member of your family or close friend who has good credit and can reach the required credit score can serve as your cosigner. It is crucial that your cosigner is aware of their legal obligation to make the monthly payments should you default on your personal loan.
Five Ways To Increase Your Fair Credit Score
Making your monthly payments on time could help you gradually raise your credit score if you are approved for a personal loan despite having fair credit. Additionally, diversifying your credit mix by opening a new type of account on your credit history
Keeping up with the debt repayment obligations on personal loans, even those with fair credit, can be a great way to repair damaged credit.
So that you won’t have to second-guess whether you have the required credit score before applying, here are a few additional ways to raise your score through responsible credit use:
One of the best ways to raise your credit score is by paying off some of your debt. Your fair credit could benefit greatly from lowering your credit utilization ratio by paying off a few credit cards while keeping the accounts open. Most financial experts suggest a credit utilization ratio under 30%.
Low credit utilization is viewed by many lenders as evidence of prudent credit use. By doing this, you’ll reduce your debt-to-income ratio as well, which ought to improve your financial situation overall.
You could ask your spouse, a member of your family, or a close friend to add you as an authorized user on one of their credit cards if you don’t have the minimum credit score required to be approved for a credit card or a personal loan.
This could give your fair credit a substantial boost overnight. You will profit from each timely monthly payment made on the account as if it were your own, and the account will be reported to the credit bureaus.
Another option for building credit is a secured credit card. You can raise your credit score with a secured credit card by making a cash deposit in exchange for a line of credit.
Your credit report will reflect each payment you make on time, accumulating your payment history up until you reach the minimal credit score required to apply for traditional credit cards and personal loans.
Regularly checking your credit report will help you find any errors and fix them right away. If you don’t check your credit report frequently enough, errors could disqualify you from receiving personal loans that you might otherwise have been approved for.
Additionally, being familiar with your credit report may help you identify what needs to be improved in order to raise your credit score from fair to excellent.
Last but not least, improving your credit score requires patience. Even though you might not see results right away, if you put forth the necessary effort, you will eventually see the results of your labor.
You’ll discover a lot of lenders eager to cooperate with you to meet your funding needs after taking some time to repair your fair credit.
FAQ
Can I get a loan with a credit score of 580?
To be eligible for a personal loan, you typically need to have a score of between 550 and 580. Personal loans for people with bad credit are available, but: You’ll probably pay a higher interest rate than other borrowers You probably won’t qualify for larger loan amounts.
What can I finance with a 580 credit score?
Borrowers with a minimum credit score of 580 with LendingPoint are qualified for unsecured personal loans. The money can be used for a range of costs, such as debt consolidation, moving, and home improvements. With loan sizes ranging from $2,000 to $35,600 and interest rates starting at 7 99%-35. 99%.
Can you get preapproved for a 580 credit score?
Rocket Mortgage accepts applicants with credit scores as low as 580 while the majority of mortgage lenders prefer a minimum of 620. Even the lender offers a free service called Fresh Start to assist prospective applicants raise their credit score prior to applying.
What is the easiest loan to get approved for?
Payday loans, car title loans, pawn shop loans, and personal installment loans are likely the loans that are easiest to get approved for. These are all emergency short-term cash options for borrowers with poor credit.