If you need cash to fund a project or pay a bill, consider taking out a personal loan. You may be wondering if you’re eligible for a personal loan at all given your credit score, and ultimately it will depend on the lender.
What is a personal loan?
A personal loan is a lump sum of money you can borrow for a variety of reasons, including home improvements, medical bills, debt consolidation, and even vacations. You’ll pay the loan back in fixed monthly installments, and it usually comes with a fixed interest rate. The amount you can borrow typically ranges from $1,000 to $100,000.
Most personal loans are unsecured, which means you don’t have to put up any collateral against the loan. The average interest rates on personal loans tend to be higher than rates on secured loans like mortgages and auto loans, and roughly comparable to credit card interest rates if you have a lower credit score.
If you need a personal loan, you should start by shopping around with different lenders and seeing which lender offers you the best terms on a loan.
What credit score do you need for a personal loan?
Generally, lenders require a credit score in the mid-600s to qualify for a personal loan, though some companies will lend to borrowers with lower credit scores. The better your credit score, the better your interest rate should be. If your credit is poor, look at Insider’s list of the best personal loans for bad credit.
Just because you don’t qualify with one lender doesn’t mean you won’t qualify with another. Here are examples of the minimum credit scores required for some popular online personal loan lenders.
However, your credit score isn’t the only thing lenders take into account when deciding to approve you for a loan. Lenders will also consider your debt-to-income ratio — or the amount of debt you owe each month in relation to your gross monthly income — and employment status, among other financial factors.
How to improve your credit score if you don’t qualify for a loan
If you don’t qualify for a loan from any lender, you can try to increase your credit score to increase your likelihood of approval. Additionally, improving your credit score can net you better terms on your loan.
To get your credit report from one of the three major credit bureaus, use annualcreditreport.com. You can get your report for free once per week through April 20, 2022. While you won’t receive your credit score on this report, you’ll get information about your credit and payment history. While reviewing your credit report, you can spot errors and figure out where you can improve.
You can obtain your score at no cost on your credit card statement or online account. You can also purchase it from a credit reporting agency.
If you have a low credit score and lenders have denied your loan applications, here are some steps you can take to boost your credit score:
- Request and review a copy of your credit report. Look for any mistakes on your report that could be damaging your score. If necessary, reach out to the credit bureau to talk about fixing the error.
- Maintain low credit card balances. Having a credit utilization rate — the percentage of your total credit you’re using — of 30% or less will prove to lenders that you can handle your credit well.
- Create a system for paying bills on time. Your payment history makes up a substantial percentage of your credit score, and lenders like to see steady and reliable payments in the past. Set up calendar reminders or automatic payments so you don’t fall behind.
If you can wait to take out a personal loan until you increase your credit score, you may qualify to borrow with more lenders and be eligible for better rates.