What Credit Score Do You Need for a Personal Loan?

If you are considering applying for a loan, you are likely curious as to what credit score is needed for a personal loan in the first place. The answer is that the minimum credit score for a personal loan varies. Borrowers with a good or excellent credit score are likely to get a lower interest rate than those with a fair or poor credit score. As a rule of thumb, most borrowers will need a credit score of at least 610 to qualify for a personal loan. And, the average consumer has a “good” credit score of 682, according to February 2021 LendingTree data.

Highlights & Key Takeaways

• Though loans are available for persons with fair or poor credit, the best personal loans typically require a good or better credit score
• The FICO score ranges from 300 to 850. Then, scores are bulked into categories. An excellent score (800 to 850), a very good score (740 to 799), a good score (670 to 739), a fair score (580 to 669), and a poor score (300 to 579).
• According to Experian, in 2022 there were 25 million consumers with at least one personal loan
• Your credit score directly impacts the rate and terms that you can get on a personal loan. For example, a personal loan for good credit could have APRs as low as 3.09% whereas a personal loan for fair credit may be closer to 5% at its lowest

What Credit Score is Needed for a Personal Loan?

As mentioned above, with some exceptions, borrowers need a credit score of at least 610 to get a personal loan. But there are bound to be differences in the APRs offered to customers based on their score type. For example, a borrower with excellent credit is far more likely to see lower interest rates than one with fair or poor credit.

And creditors will look at several factors when making a lending decision.

• Your credit score
• Credit history 
• Debt-to-income ratio

So, if you have good credit, lenders such as Upstart, SoFi, and Discover might have suitable options with competitive APRs and the loan amounts you are looking for. Conversely, if you have fair credit, you might be better served by Rocket Loans, Figure, or Opportun Loans. 

And finally, if you have bad credit, don’t fret because there are loans out there for those with a bad credit score. One Main Financial is a great option for prospective borrowers that have been denied elsewhere. Other suitable lenders for those with bad credit include Payoff and Avant.

4 Ways Your Credit Score Can Influence Personal Loans

Your credit score can directly impact the outcome of your personal loan application. Here are just a handful of ways.

• A low credit score may require you to put down a security deposit or list available collateral to secure the loan
• A high credit score can afford you lower interest rates and can improve your credit ability, allowing you to take on a larger loan than someone with a lower score
• A higher score increases the lender’s confidence that you can make payments on time 
• Some lenders may reduce their down payment requirements if you have a high credit score (for example, if you are applying for an auto loan or mortgage)

What Makes Up Your Credit Score?

Wherever your credit score falls on the rating scale, you must understand the factors that go into it. Because not only does your current score affect the type of personal loan you can get, but getting a personal loan also impacts your future credit score.

• Payment history. This is the most important factor used by the credit bureaus when calculating your score, representing 35% of the overall calculation. For this reason, it is critical that you make your payments on time, all the time.
• Credit utilization. Many borrowers mistakenly assume they can borrow up to their credit limit if they take out a new credit card. But in reality, the credit bureaus like to see utilization under 30%. So, if you have a $10,000 credit line, keep your balance at $3,000 or less. This factor accounts for 30% of your FICO score.
• Credit history. It can take up to six months to build a credit history from scratch, but it doesn’t stop there. The longer your credit history (especially if it is good), the better. Your credit history length comprises 15% of your credit score.
• Credit mix. No creditor or credit bureau likes to see a borrower with too many credit cards or outstanding loans. The best credit mix consists of a mortgage (or lease/ rental), an automobile loan or lease, a student loan or other personal loan, and maybe one or two credit cards. Diversification of credit is the key, and this factor accounts for 10% of your FICO score. 
• New credit. Last but not least, borrowers should be mindful when it comes to applying for new credit products. Every time to apply for credit, a hard inquiry is applied to your credit score, dropping your score by up to five points. Too many applications or new accounts can hurt your credit score. This factor represents the remaining 10% of your credit score.

“When applying for any credit, the better your credit, the more likely you will get favorable terms such as lower interest rates. If you have poor credit, you will likely receive a higher interest rate on your loan or credit card, meaning you'll spend more money paying back the loan.”

Additional Factors That Influence Personal Loan Eligibility

Of course, lenders look at many things when determining your creditworthiness. Though the credit score is important, it isn’t everything. Lenders will also consider the following:

• Purpose of the loan - Some lenders restrict the loan to certain purposes. For example, auto loans are for purchasing a new or new-to-you vehicle. Other personal loans might be specific to home improvement, purchasing a pool, or taking a much-needed family vacation.
• Co-signer or joint application - If you are still early on in building your credit, or you have a poor or fair credit score and want to improve your credit, then you may be best served by asking a responsible family member or friend to co-sign on a joint credit application with you. This allows you to piggyback on their good credit history as you build your own creditworthiness. 
• Unemployment protection - Also referred to as unemployment benefits or unemployment insurance, some creditors may ask questions about your employment history and want to know how long you have been employed. However, you need to know that unemployment income isn't reported to credit bureaus. 
• Employment (POI – Proof of Income) - Knowing that you are employed, who your employer is, and how long you have been at recent employers helps lenders verify your identity and assess your risk as a borrower.
• U.S citizenship - Some personal loan providers only offer loans to people who are U.S. citizens or meet certain income requirements. The fewer strict requirements a lender has, the better. Conversely, while financial institutions cannot discriminate based on “national origin,” they are free to discriminate based on immigration status. Asking for your citizenship helps them do that.
• Debt-to-income ratio - Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. Lenders like to see a debt-to-income ratio of under 48%. Your DTI is one of the ways lenders can measure your ability to manage your monthly payments and pay back what you owe.
• Types of credit accounts and outstanding debt - Lenders also like to understand your credit mix; this represents 10% of your overall credit score. Too many credit cards or personal loans can make you look like a credit risk and may lessen your chances of approval. Further, the more credit accounts you have open, the higher the likelihood is that you will develop a DTI over 48%, thus making it harder for you to meet your loan obligations.
• Personally identifiable information - Lenders will always check to ensure they know who you are. For this reason, they will request your social security number, age, address, etc., and ask for verifiable bank information.

How to Apply for a Personal Loan

Personal loans can be taken out for various reasons, from debt consolidation to unexpected medical bills to home improvement, vacationing, and so much more. And though these loans can be used for varying purposes, the steps to apply for a personal loan are generally the same from loan to loan.

• Consideration. During this step in the game, consider what type of loan you will need, the purpose, and how much you will need. As part of this, consider how much you can afford to pay each month. This will help you narrow down your options during the next step.
• Shop around. No two lenders are exactly the same. Just as there are different rates and terms for good credit scores vs. bad ones, lenders may have slightly different terms. Not only that, but some lenders require collateral or security deposits, origination fees, etc. So, before you apply, shop around to find the lenders that make the most sense for your needs and financial situation.
• Check your credit score. Check with your current credit card or loan providers or your bank to see if you have free access to your credit score through one of their programs. If not, you can access your credit score by contacting one of the bureaus. Knowing your credit score can help you understand what type of interest rate and terms to expect. If your credit score is lower than you thought, consider if you can take steps to improve your score before applying.
• Prequalify with multiple lenders to compare estimated rates and payment amounts. During this prequalification process, you will need to provide personally identifiable information, such as your name, date of birth, income, and purpose of the loan.
• Complete the application. Make sure you have your identification, address information, and proof of income at the ready. Remember that the creditor will perform a hard credit check to determine your creditworthiness. This can impact your credit score negatively by as much as five points and will remain on your credit record for up to two years.
• Read the fine print before you sign. Once approved for a loan, you will need to complete a loan agreement, a document between you and the creditor detailing your loan, and the applicable loan repayment schedule. Specifically, make sure you can pay the minimum amount due (or more) each month, confirm the APR, and look closely for fees you might be assessed along the way.

If you have bad credit, the above steps are generally the same. However, your prequalification process will likely include secured loans, or you may need a co-signer. If you determine a co-signer is necessary, make sure they agree to co-sign with you and have their details on hand for the application.

Personal Loan Alternatives

Though personal loans can be used for just about any purpose imaginable, sometimes they aren’t an option, especially if you have bad or fair credit. The good news is that there may be other options available.

• Credit cards are a great option to get the money you need and help you improve your credit card. Take steps to pay off your balance in full every month. If you can’t pay it off each month, ensure your utilization is under 30% and that you make your payments on time.
• Draw from your home equity line of credit. A home equity line of credit (HELOC) is a great way to consolidate debt or quickly access cash.
• 401(k) loan. Taking out a loan (or withdrawal) from your 401(k) is an option, but you may want to consider it as a last resort. Most 401(k)s have heft penalties for early withdrawal. That said, your plan might allow you to take out a loan that you pay back to yourself over time, interest included. If you do go this route, however, understand that your 401(k) will grow out at a slower rate until you pay it back, as there are fewer funds in the account.
• Salary advance. Not the same as a payday loan (payday loans are a costly option and should be considered in emergencies only), your employer may offer a salary advance. In these situations, you can receive some or all of your paycheck in advance.
• Personal line of credit. A personal line of credit is a loan offered by your bank that you can access when needed. To access funds, you usually need to write a special check or request a transfer from your bank representative or online. 

How to Improve Your Credit Score Before Applying

If your credit score for a personal loan isn’t where you want it to be, and you don’t want to pursue a loan for poor credit, consider improving your score before applying. After all, the minimum credit score for a personal loan is around 610; this low credit score will not afford you the low-interest rates or borrowing ability that a good credit score can offer.

Here are some tips to help you improve your credit score before applying for a personal loan.

• Pay down your credit cards. In doing so, you are not only improving your utilization rate but also developing a better credit history by paying your bills on time.
• Remember that 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. So, take this time to improve your credit score and consider if you need the loan in the first place.
• Ask for a higher credit limit from an existing creditor. If you have been paying your bills regularly and on time, you may be able to borrow more on a credit line that you already have. Credit utilization accounts for 30% of your FICO credit history and score. As such, a higher credit limit can improve your utilization.
• Review your credit report closely for any inaccuracies and file a dispute if you find an error. All three credit bureaus, Experian, Equifax, and TransUnion, have documented processes to help you file a dispute and correct your credit report.
• Address collections accounts. If you have an account in collections, take steps to address your amount due before taking out a new loan. Collections accounts can seriously damage your credit score, and though it might take some time to resolve the issue, it will be well worth the effort.
• Add to your credit mix. This might seem a bit counterintuitive, especially since we are recommending steps to take to improve your credit before applying for a new loan. Still, sometimes a new loan can have a positive effect. If you are heavy on the credit card side, now might be a good time to apply for a debt consolidation loan that can help you combine your balances at a lower interest rate. This will help your utilization and save you money.

Final Word

When it comes to a credit score for a personal loan, the magic number is usually 610. But a good credit score of 670 or higher will help you get better rates and terms. If your credit score is under 670 and you don’t need the funds from a personal loan right away, follow the steps above to improve your credit score first. Not only will you improve your credit score in the process, but you’ll also make those monthly payments easier later.