Published in: Personal Loans | Aug. 7, 2019
By: Lyle Daly
Your credit score plays a major role when you apply for a personal loan.
If you’re planning to get a personal loan, you probably already realize that your credit score is going to come into play. It’s one of the most important factors that a lender will look at during the application process, and that can be a bit scary if your score isn’t the best.
You obviously don’t want to apply for a personal loan if you’re already doomed to failure because of your credit. It’s a waste of time, and since the lender will pull your credit file, your credit score will also drop a few points from the hard credit check. So before you start shopping around for personal loans, you need to know what credit score you’ll need for an approval.
While minimum credit score requirements vary depending on the lender, you’ll typically need a score of at least 550 to 580 to qualify for a personal loan.
If your credit score is in that range, then your lender options will be limited, and you’ll need to specifically search for personal loan providers that lend to borrowers with bad credit scores.
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There are certain types of personal loans that don’t require a credit check. Payday loans and car title loans are two common examples. Although you could get one of these no matter your credit score, they are short-term loans that tend to have very high interest rates, with APRs often exceeding 300%. This makes them a poor choice in all but the most desperate of situations.
Your credit score is one factor that a personal loan provider uses to figure out how much of a risk it is to lend you money. Lower credit scores correspond to higher delinquency rates, so borrowers with bad credit present a greater risk of missing payments and defaulting.
When you apply for a personal loan, your credit score helps determine whether you’re approved and, if you are approved, the terms of your loan. Lenders look at a variety of factors, including your income, your employment, your debt-to-income ratio, and your credit history, but your credit score is among the most important.
Here’s a general idea of what you can expect as you look for personal loans depending on your credit score:
To ensure you get the best deal on a personal loan, there are a few important steps you should take before you apply.
Check your credit score. You need to know your credit score so that you’ll know which lenders to consider. After all, it doesn’t make sense to apply with a lender that has a minimum credit score of 660 if you have a 600.
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See if you can improve your score. If you have an excellent credit score or you need a personal loan ASAP, then you can go ahead and disregard this step. Otherwise, it’s a great idea to get your score as high as possible before you apply for a personal loan. A better score could save you quite a bit of interest.
Check out your lender options. The final step is to figure out which lender you should choose. Start by picking out some lenders with minimum borrower requirements that you meet.
Next, go to each lender’s site and enter some of your basic information to get a personal loan prequalification. This is where lenders show you what kind of rates they can offer you, and it doesn’t require a hard inquiry on your credit file.
Once you’ve compared rates this way, you’ll know exactly which lender to choose so that you get the best terms on your loan.
If you have a bad credit score and you need a loan, there are several options to consider:
Let’s take a closer look at each of these options.
Find a cosigner. If you have a personal loan cosigner, the lender will use that person’s financial information and credit score instead of your own. You can then get a loan under the terms your cosigner qualifies for.
This is an excellent way to get a low-interest personal loan even without a good credit score. The challenge is finding someone with good to excellent credit who agrees to cosign your loan application, as it’s a big risk on their part. They have the same level of responsibility that you do on the loan, and anything you do could impact their credit.
Apply to a lender that serves borrowers with bad credit. As we’ve gone over, there are lenders that serve borrowers with bad credit out there, so you could apply with one of them to get the loan you want.
This should be a last resort, because you will end up paying quite a bit of interest.
Borrow against your home, retirement account, or another asset. One final option is to borrow against an asset where you’ve built up equity. Here are a few such options:
These all have their drawbacks. With HELOCs and auto equity loans, you’re putting your home or your car at risk should you default.
401(k) loans usually require you to have payments automatically deducted from your paycheck, but if you don’t stick to the repayment plan or if you lose your job and can’t pay the loan back right away, then the loan could be considered a distribution. At that point, you’d owe taxes on it and potentially an early withdrawal penalty.
There are personal loan options for just about every credit score, and even some that don’t require a credit check at all. If you absolutely need a loan, odds are that you can get one.
Your credit score will, however, determine the loan options available to you and how much interest you end up paying. For that reason, it’s in your best interest financially to work on your credit score as much as you can, and then get your personal loan.
Every bit of progress you make on your credit will open up more lender options and potentially help you qualify for lower interest rates. That can make a big difference in how much you pay total for your loan, especially if you need to borrow a large amount of money.
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