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It's possible to get a personal loan with a lower credit score, but a FICO® Score☉ that falls in the good range (670-739) or higher will give you access to a broader array of lenders and better interest rates.
A personal loan is an unsecured loan—one that doesn't require property to be put up as collateral—that can be used for just about any purpose you choose. Loan amounts typically range from $1,000 to $10,000, and popular uses include debt consolidation, covering medical expenses, and financing once-in-a-lifetime events such as weddings, honeymoons and dream vacations.
Why Do I Need a Good Credit Score for a Personal Loan?
When applying for a personal loan, or any other type of credit, a good credit score can mean a greater range of choice for you in terms of lenders and loan offers, and more attractive borrowing terms (interest rates and fees).
Credit scores represent your history with credit as recorded in your credit reports, and give lenders a sense of how experienced and responsible you are in handling debt. Higher credit scores correlate with lower likelihood of failing to repay debts, so lenders consider it riskier to lend money to borrowers with low credit scores than to those with high ones. They typically offer their best deals on loans and credit (lowest fees and interest rates) to borrowers with high credit scores. Lenders usually charge more to borrowers with lower scores to offset their greater chances of loan default, and if an applicant's credit score is too low, might not even offer them credit at all.
Each of your credit scores reflects the information in your credit file at each of the three national credit bureaus (Experian, TransUnion and Equifax), as analyzed by a credit scoring system such as the FICO® Score or VantageScore® model. While their specific calculations are highly guarded trade secrets, all credit scoring systems are broadly responsive to the same basic set of factors:
- Payment history: Making monthly debt payments on time, consistent with your borrowing agreement, is the single most important factor affecting credit scores. Even one missed payment can have a negative impact on your score. Payment history accounts for 35% of your FICO® Score.
- Credit utilization ratio: Credit utilization is calculated by dividing the total amount of your credit card balances by the sum of all your card borrowing limits. Creditors prefer utilization rates of no more than 30%, and higher utilization can hurt your credit score. Credit utilization accounts for 30% of your FICO® Score.
- Credit history length: Assuming you keep up with your bills and avoid excessive credit balances, the longer your credit history, the higher your credit score is likely to be. Credit scoring models consider the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. How long you've held credit accounts makes up 15% of your FICO® Score.
- Credit mix: People with exceptional FICO® Scores often carry a variety of credit accounts, such as car loans, credit cards, student loans, mortgages and other credit products. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of debts. Credit mix accounts for 10% of your FICO® Score.
- New credit: The number of credit accounts you've recently opened, as well as the number of recent hard inquiries lenders have made in response to your credit applications, accounts for 10% of your FICO® Score. Too many recent new accounts or inquiries can indicate increased risk and hurt your credit scores. As long as you keep up with your bills, drops in your credit scores related to new accounts typically vanish in a few months.
What Else Affects Personal Loan Eligibility?
When lenders consider personal loan applications, their top concerns are your ability and reliability when it comes to repaying the loan. Your credit score is an indication of reliability, but they typically require proof of income as well, in the form of one or more of the following:
- Proof of employment
- Pay stubs
- Tax return
- Documentation of other income sources (pension, investment income, disability compensation, etc.)
A lender might also ask for evidence of savings or other sources of cash you could tap as needed to cover your loan payments.
How to Get a Personal Loan With Bad Credit
If your FICO® Score is in the poor range, or even the lower end of the fair range, you may have challenges getting approved for a personal loan, but there are borrowing options available to many borrowers with less-than-ideal credit.
Some of those options are best avoided, including:
- Payday loans and other "no credit check loans" that promise cash in a hurry at tremendously high interest rates (300% or even 400% APR).
- Car title loans, which often come with high rates as well, and which can lead to the lender seizing your car if you're unable to make a payment.
Better alternatives for borrowers with subpar credit include:
- Some peer-to-peer (P2P) lenders offer personal loans to applicants with credit scores as low as 580, and a few ignore credit scores altogether, instead using alternative criteria, such as your work and educational history, to gauge creditworthiness.
- Credit unions often offer members more lenient borrowing terms than banks and other traditional lenders. You have to have an account at the institution to be a member, and it may have to be open for 30 days before you're eligible for certain loans. In addition to personal loans, some offer loans known as payday alternative loans (PALs) that can get you up to $1,000 quickly and without a credit check, on borrowing terms far more favorable than those of payday lenders.
Improve Your Credit Score Before Applying
It's always a good idea to check your credit score before you apply for any loan and, depending on how urgently you need your personal loan, it could be to your benefit to take six months to a year to focus on improving your credit score before submitting your application. You won't be able to convert a score in the fair range to one that's exceptional in that short a time, but you might be able to bump a fair score up to good, or a good one to very good—improving your odds of getting a loan in the first place, or of getting a favorable interest rate.
The steps you can take to improve your credit score quickly will depend in part on your individual credit history (and the risk factors that appear with your credit score may help focus your efforts most efficiently). But the following steps often have the quickest impact, and can lead to appreciable score increases within 12 months or even less:
- Pay down outstanding credit card balances, especially on any accounts with balances that exceed 30% of their borrowing limit.
- Pay all your bills on time without fail.
- Avoid applying for any new loans or credit cards, to give the impact of any recent credit inquiries time to subside.
Personal Loan Alternatives
If you're unable to get a traditional personal loan, you may be able to bridge your need for cash via one of these alternatives:
- Credit card cash advance: Many credit cards let you borrow cash at ATMs by entering a special personal ID number (PIN) along with your card. This can be a convenient way to get money fast, but card issuers typically charge interest rates on advances that are even higher than the ones they apply to standard purchases.
- Peer-to-peer loans: Web-based lending sites that compete with traditional financial institutions don't always check credit scores, but they do typically require evidence of income and other assets that can make loan approval difficult for those with a limited credit history or poor credit scores. It's worth investigating these sites anyway, especially if you keep the loan amount small (under $5,000).
If other options fail, consider a debt management plan (DMP). Under a DMP, you work with a certified credit counselor who may negotiate with your creditors to accept less than the total amount(s) you owe. Participation in a DMP entails closing all of your credit card accounts, and it is noted in your credit reports. Because lenders view it as a severely negative event, pursuing a DMP can hinder your ability to borrow money for several years afterward.
Access to a personal loan when you need one (or even when you just want it) is one of the many benefits of establishing and maintaining a healthy credit score. When you think you're ready for a personal loan, explore the offers matched to your credit profile with Experian CreditMatch™.