Getting a loan requires a credit check, so understanding your credit score is important. In general, you’re more likely to access better terms if your score is at least 640. But even if you don’t have that credit score, there are still options.
- A credit score of at least 640 is more likely to provide access to the best loan terms.
- You can get a personal loan with a lower credit score, but you might pay a higher interest rate as a result.
- For some personal loans, you might need to verify your income or connect a bank account.
Average Credit Score Needed for Personal Loans
Every lender has its own criteria for personal loans—including the minimum credit score that they will accept. In general, though, you stand a better chance of accessing the best terms when you have a credit score of at least 640.
However, it’s possible to get a personal loan with a lower credit score. For example, some lenders might offer you a personal loan if you have a score as low as 580. Others might offer loans for even lower scores, but you might need to provide collateral or get a co-signer.
Understanding FICO Scores
When you apply for credit or engage in other financial transactions, your credit score might be used to determine whether the lender or financial services provider considers you likely to repay the loan or meet the terms of your obligation.
The most commonly used scoring system was created by FICO (formerly Fair Isaac Corp.). It’s known as the FICO Score, and it numerically represents your perceived creditworthiness using a scale of 300 to 850.
Your FICO Score is based on the information in your credit report. The three main credit reporting agencies (Equifax, Experian, and TransUnion) receive information from creditors and compile it into an individualized report. Your score might vary slightly depending on which agency your creditors report to.
Your FICO Score is based on five categories, each of which is weighted differently. Here’s the breakdown of how the information in your credit report impacts your score:
- Payment history (35%): This category includes whether you make your payments on time and pay at least the minimum amount.
- Amounts owed (30%): Sometimes called your credit utilization, this category considers whether you’re using a large amount of your available credit.
- Length of credit history (15%): How long you’ve had credit, in addition to the age of specific accounts.
- Credit mix (10%): This category takes into account the different types of loans you have, such as installment loans (like personal loans) or revolving credit (like credit cards), in addition to the types of companies that hold your debt.
- New credit (10%): Opening a lot of accounts in a short period of time could negatively impact your credit score.
Personal Loan Options for Fair or Poor Credit
While you’re more likely to get a better interest rate with a higher credit score, it’s still possible to get a personal loan if you have fair or poor credit.
The following ranges can give you an idea of whether your credit is considered good, fair, or poor:
- Exceptional: 800–850
- Very good: 740–799
- Good: 670–639
- Fair: 580–669
- Poor: Below 580
If your credit is at least fair, there’s a good chance that you’ll be able to get a personal loan, as long as you don’t have too much other debt and are willing to pay a higher interest rate.
Some of the lenders that offer emergency loans for bad credit include Upgrade, Avant, OneMain Financial, and Upstart. Another option is to check with your credit union to see if you can access funding as well. Some credit unions might offer access to fair- or poor-credit loans.
Another possibility is to look for a lender that will allow you to secure your loan. You might also be able to find a lender that will let you take out a loan with a co-borrower or co-signer with good credit.
How Personal Loans Affect Credit
A personal loan has the potential to impact your credit score both positively and negatively.
Depending on how you use your personal loan, its positive effects might include:
- Build your payment history: When you make on-time payments, your lender reports to the credit bureaus, potentially improving the most important factor in your FICO Score.
- Boost your credit utilization: Installment loans aren’t included in your credit utilization ratio, so if you use a personal loan to pay off some of your credit card debt, you could see an improvement in your credit score.
- Credit mix: If all the credit you have been using up to this point is revolving credit (i.e., credit cards), then adding an installment loan (i.e., a personal loan) can give your score a small boost.
On the other hand, having a personal loan can have a negative impact on your credit if you aren’t careful. First, getting the loan can result in an inquiry on your credit report and cause your credit score to decrease slightly. On top of that, if you don’t make your payments on time and in full, it could result in a much lower credit score.
Other Factors in Qualifying for a Personal Loan
While your credit score is a major part of qualifying for a personal loan, it’s not the only factor that a lender will consider. Each lender has their own criteria, but in general, there’s a good chance that a lender will also look at your income and employment history, cash flow, and how much debt you already have.
If your income isn’t sufficient to make monthly payments, or if you have a high debt-to-income (DTI) ratio, then you might not qualify for a personal loan, even if you have fair to good credit. Additionally, if it looks like you have a lot of delinquent accounts or a history of missed payments, then it might be harder to get a loan if you don’t have some type of collateral.
Finding the Best Personal Loan for You
When comparing different personal loan options, consider your own financial situation. Determine what terms are more likely to work for you, and try to get a personal loan that fits those needs. Some factors to keep in mind include:
- Interest rate: Double-check the interest rate being offered. The higher the interest rate, the more you’ll pay overall. Try to get the lowest interest rate possible.
- Fees and penalties: Many personal loans come with origination fees that can add to the cost. You might pay a higher origination fee if you have poor credit. Additionally, make sure there are no prepayment penalties before you sign the loan agreement.
- Term length: Figure out how long you might need the loan. It’s not uncommon to find personal loans with terms ranging from two to seven years. A longer term might result in more manageable payments, but you also need to be prepared to pay more overall in interest.
- Amount needed: Make sure your lender isn’t offering more or less funding than you actually need. Also, if you’re trying to secure a larger loan amount, determine whether you’ll require collateral.
Consider comparing three to five different lenders to see which one might offer terms that work best for you. Many lenders offer pre-qualification, which can give you an idea of what to expect without affecting your credit score.
What Factors Affect Your Credit Score?
The factors that impact your credit score depend on the model being used. However, the most commonly used score, FICO, is based on your payment history, credit utilization, length of credit history, credit mix, and new credit.
How Can You Improve Your Credit Score?
In general, you can potentially improve your credit score by paying down high credit card balances and making your other debt payments on time. These two actions are considered the fastest way to boost your credit score.
Can a Personal Loan Improve Your Credit Score?
A personal loan can potentially improve your credit score if you make on-time payments. However, if you miss payments, you could end up with a much lower credit score.
The Bottom Line
Depending on your situation, there’s a good chance that you’ll be able to get a personal loan, as long as you have a credit score of at least 580. However, you’re more likely to pay more in interest and might only be able to access small loan amounts if your score is less than 640.
While it’s possible to get a loan with poor credit, you might need a co-borrower or collateral, or you may be forced to turn to payday loans, which can have even higher interest rates.
Consider improving your credit score before applying for a personal loan if you want the best terms.