Your credit score is a major factor lenders consider to determine if you’ll be approved for a personal loan. To qualify for the best interest rates and terms, you’ll generally need good credit, meaning a FICO score of 670 or higher.
Each lender has their own minimum credit requirements for personal loans, however. There’s no specific credit score that means you will or won’t be able to take out a personal loan. You can still get a personal loan if you have poor or fair credit, but you’ll likely be offered higher interest rates.
- What is a personal loan?
- How does a personal loan work?
- What credit score do you need for this loan?
- Why does your credit score matter when applying?
- How to get a loan with bad credit
- What to consider when choosing a lender
- How do you apply for personal loans?
What is a personal loan?
A personal loan is money you borrow from a financial institution like a bank, credit union, or online lender. Personal loans are versatile and can be used for a variety of expenses, from covering the costs of a medical procedure to funding your wedding or vacation. While eligibility criteria will vary among lenders, here are some basic requirements to consider:
- Credit score: Your credit score gives lenders an idea of how likely you are to repay your loan. Having a good credit score (670 to 730 or higher) will help you lock in a low interest rate and favorable loan terms. Many lenders work specifically with borrowers with poor or fair credit, but you’ll likely be quoted much higher interest rates. You can add a cosigner or co-borrower to your loan application to increase your chances of getting approved, or to get a lower interest rate than you’d get on your own.
- Income: Lenders want to make sure that you’ll be able to comfortably afford your monthly loan payments. Minimum income requirements will vary among lenders. For example, you’ll need at least $1,200 in monthly income to be eligible for a loan from Avant, while LendingPoint requires $20,000 in annual income.
- Debt-to-income ratio: Your debt-to-income (DTI) ratio measures how much of your monthly income goes toward paying off other debts, like auto loans and credit cards. For personal loans, lenders typically like to see a DTI no higher than 40%.
| Good to know: While the upper borrowing limits for personal loans vary by lender, they usually fall in the $35,000 to $50,000 range. Some lenders offer larger personal loans of up to $100,000 for those who qualify. |
How does a personal loan work?
You can apply for a personal loan online or in-person, depending on the lender. The lender will evaluate your credit score, income, and financial documents (such as tax returns and pay stubs) to determine if you qualify.
If you’re approved, the time to fund for personal loans varies among financial institutions, but most online lenders are able to distribute loan funds as soon as the same or next-day of approval, or within a week.. Most lenders will disburse the money via direct deposit, but some will offer a check or prepaid card. Others, in the case of debt consolidation loans, may offer to pay off your creditors directly.
After you get your loan, you’ll pay back what you borrowed, plus interest and any applicable fees in equal monthly installments, typically over one to seven years. Most personal loans are unsecured, meaning you don’t have to back them with collateral, like your house or car, that could be vulnerable to seizure if default on the debt.
What credit score do you need for a personal loan?
The minimum credit score for a personal loan will vary by lender. But you may need good to excellent credit (a FICO of 670 to 739) to get approved and lock in the competitive interest rates and various term options. You’ll likely need a very good score (740 to 799) or an excellent one (800 to 850) to secure the bargain-basement APRs that lenders advertise.
Many lenders also offer personal loans to borrowers with poor or fair credit, and some even specialize in lending to borrowers who are working toward building their credit. Just keep in mind that if your credit is less than stellar, lenders may see you as a risky investment and offer you a higher interest rate to offset the risk of loaning you money.
You can apply with a cosigner (or co-borrower) with good credit to lock in a lower rate than you’d get on your own. Even if you apply with a cosigner, you should be able to comfortably afford your monthly payments. Otherwise, your cosigner will be on the hook for repaying your loan.
Why does your credit score matter when applying for a personal loan?
Your credit score is a three-digit number ranging from 300 to 850 that shows lenders how responsible you are with debt. The higher the number, the better your credit. The three credit bureaus — Equifax, Experian, and TransUnion — measure your credit based on information in your credit report, including factors like your payment history and how much debt you owe.
In general, lenders prefer a high credit score as it gives them confidence that you’ll pay back the money you borrow. Low credit implies that you’re a riskier borrower that might default on your loan. But if you have a low credit score, there are still lenders you might qualify with.
What factors affect your credit score?
The most common factors that affect your credit score include:
- Payment history: This explains whether or not you make timely payments on your credit cards, mortgage, car loans, and other bills. Even one late or missed payment can bring down your score. On the other hand, consistently paying all of your bills on time is an easy way to boost your credit.
- Credit utilization: Credit utilization reveals how much of your available credit you actually use and mainly applies to lines of credit, like credit cards. To calculate your credit utilization ratio, divide your balance by your credit limit and multiply by 100. For example, if your balance is $2,000 and your credit limit is $10,000, your credit utilization ratio is 20%. A good credit utilization ratio is typically 30% or less.
- Credit history length: This refers to how long each of your accounts have been open. The longer your accounts have been open for, the more they’ll benefit your credit. That’s why it can be a good idea to maintain older accounts, such as for a credit card, instead of closing them.
- Credit mix: Credit mix includes the different types of credit you have, such as mortgages, credit cards, personal loans, and student loans. It also measures your experience with managing both revolving debt and installment loans. Having diverse accounts can help raise your credit score.
- New credit: Opening new lines of credit leads to lenders performing hard credit inquiries and lowers the average age of your credit history, which can drag down your score. Only apply for new credit when you absolutely need it.
How a personal loan will affect your credit score
After the prequalification process, when you formally apply for a personal loan with your preferred lender, the lender will perform a hard credit check to determine if you’re eligible. This can cause your credit score to temporarily fall by five points or less, but it will usually recover within a few months.
Fortunately, a personal loan may also help your credit score in the long run. If you consistently make your payments on time, you’ll likely see an improvement. A personal loan can also diversify your credit mix, which can positively impact your credit as well.
How to get a personal loan with bad credit
Several lenders specialize in offering bad credit loans. These lenders are more likely than others to approve your application for a personal loan, even if your credit is less than ideal.
When you submit an application, bad credit personal loan lenders will look beyond your credit and consider other factors, like your income and employment situation. Just keep in mind that you’d likely have to settle for a higher interest rate.
You can increase your chances of approval and potentially land a lower interest rate by applying with a cosigner (or co-borrower) with good credit. Be aware, though, that if you miss payments or default on your loan, not only will your credit score take a hit, but your cosigner’s will, too.
Consider the following Credible partners that work with borrowers with poor or fair credit:
| Lender | Min. credit score |
|---|---|
| Achieve | Undisclosed |
| Avant | 550 |
| Best Egg | 600 |
| Discover | 660 |
| Happy Money | 600 |
| LendingClub | 600 |
| LendingPoint | 580 |
| LightStream | 660 |
| OneMain Financial | None |
| PenFed Credit Union | 660 |
| Prosper | 640 |
| Reach Financial | 600 |
| Tally | 660 |
| SoFi | Undisclosed |
| Universal Credit | 560 |
| Upgrade | 580 |
| Upstart | 580 |
Factors to consider when choosing a personal loan lender
Before you commit to a personal loan, consider these factors.
- Interest rate: The interest rate is the amount you’ll pay to borrow money, expressed as a percentage. The interest rate you’ll be offered will largely depend on your credit score. A lower rate can save you hundreds or even thousands over the cost of your loan. It’s better to compare loans by their annual percentage rates (APRs) instead of interest rates, because APRs account for lender fees in addition to interest.
- Repayment terms: Repayment terms are the amount of time you have to repay a loan and typically range from one to seven years. Opting for a shorter term will minimize interest charges over the life of your loan, while longer terms will lower your monthly payments but add up in interest costs over time.
- Loan amounts: Loan amounts can range from $1,000 up to $100,000 depending on the lender and, in some cases, your borrowing purpose. It’s important to only borrow what you need (and can reasonably repay) to avoid falling into a cycle of debt.
- Fees: Some lenders charge fees in addition to interest. This can include origination fees, which is an administrative fee you pay to borrow money and is deducted from your loan funds. Other fees can include prepayment penalties for paying off your loan early, or late fees for making payments after the due date.
- Cosigner option: A cosigner is someone with good to excellent credit who agrees to repay your loan if you fail to make payments. Not all lenders allow cosigners, but some do. Even if you apply with a cosigner, you should be able to comfortably afford your monthly payments to avoid damaging your credit, as well as your cosigner’s.
You can use a personal loan payment calculator to estimate how much your payments will cost each month.
How do you apply for personal loans?
If you’re ready to get a personal loan, follow these four steps:
1. Compare lenders: Shop around and compare lenders. As you do, consider interest rates, repayment terms, fees, and eligibility requirements. Prequalifying will give you a more accurate idea of what APRs and terms you qualify for.
2. Pick a loan option: Choose a loan option that best suits your needs. Ideally, it would comfortably fit within your budget and still allow you to meet your financial goals.
3. Complete the application: Once you’ve chosen a lender, fill out an online or in-person application. Be prepared to submit documents like pay stubs and tax returns — and ready for a minor and temporary negative impact to your credit score.
4. Get your funds: If you’re approved and want to accept the loan, you’ll sign a loan agreement. The time to fund for personal loans can range from as soon as one to two business days to as long as a week, depending on the lender.