The minimum credit score needed to qualify for personal loans is 560 to 660 but credit score requirements vary across lenders. A lot of lenders prefer borrowers with excellent credit scores but some lenders might also accept borrowers with bad or average credit (below 630). Some lenders often implement the FICO credit scoring model while others use different data points to determine whether to approve your loan request or not.
A high credit score doesn’t necessarily mean your loan request will get approved or that you will be eligible for low interest rates. That relies heavily on your creditworthiness which is typically a combination of your credit score, history, along with your monthly income and previous debts.
If you have bad credit, then you can consider opting for signature loans. These are a type of personal loan offered by banks and other finance institutions that only require just a signature and the borrower’s written promise to pay off the debt instead of physical collateral.
How does credit score affect loan applications?
When you are applying for a personal loan, the lender will evaluate your creditworthiness to decide how likely you are to pay off the debt on time. Your credit score is a crucial sign of your creditworthiness and if you have a bad credit score, the lenders are more likely to view you as a credit risk. You have a higher chance of defaulting on the loan so your application is likely to get denied.
Listed below are 5 ways your credit score can affect your personal loan application:
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- Eligibility: Most lenders usually have a minimum credit score requirement you will need to satisfy to get your loan request approved. If your score falls below their stated threshold, you might still be able to qualify if you can add a cosigner with a high credit score to your application. If you aren’t able to find a good cosigner, the lender will simply reject your application.
- Interest rate: Most lenders use risk-based evaluation to determine loan interest rates. If you have an average credit score, lenders might charge you a higher interest rate to counterbalance that credit risk. A higher credit score typically implies that you have firm control over your debts and personal finances and hence you can be charged a lower interest rate.
- Fees: Some lenders may charge an origination fee which will be deducted from your loan amount. If you have good credit, you are more likely to qualify with a lender that won’t charge you this fee upfront. Additionally, among lenders that do charge the origination fee, the fee might rely on your creditworthiness.
- Loan amount: if you have a low credit score, you might not qualify for higher amounts of loan because you might default on the loan. With a higher credit score, you can qualify for large sums of loans.
- Repayment term: People with low credit scores may qualify only for shorter repayment terms which would make the monthly repayment amounts a little higher. People with higher credit scores can qualify for longer repayment terms which would lower their monthly repayment amounts.
What’s considered a good credit score?
Credit scores are calculated on a 900-point range that helps determine the chances you will pay off your debt on time. Although credit scoring models will vary among lenders, usually credit scores from 660 to 724 are considered good. But what about the other score ranges? Listed below are the other ranges and what they signify to the lenders:
- 300 to 599: Poor
- 600 to 659: Fair
- 660 to 724: Good
- 725 to 759: Very good
- 760 to 900: Excellent
Credit scores help lenders determine how likely you are to pay off your debt obligations. The credit scoring models may vary but lenders will use your debt history, length of credit history, and credit utilization to determine whether to approve your loan request or not.
Conclusion
It’s still very much possible to get approved for a personal loan with bad credit but the terms will likely not be favorable. People with higher credit scores will always qualify for higher amounts, lower interest rates, and a lenient repayment term. Before applying, it’s always best to analyze your finances and if possible, improve your credit score.
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