Personal loans are a flexible type of loan that you can use for almost any purpose. The good news for borrowers is that you can get a personal loan with most types of credit scores. People with fair credit can find loan options, and even those with poor credit may be able to find willing lenders.
Your credit influences more than just your chances of approval. It can impact the price of the loan. With poor credit, borrowing money may be prohibitively expensive. We’ll break down what you need to know about personal loans and how your credit score impacts them.
What Credit Score Do You Need to Get a Personal Loan
Loans are available for borrowers with almost any credit score. The lower your score, the more expensive the loan will be. As your score gets lower, you may have to look harder to find a lender.
💡 Tip: If your credit score is very low or you have no credit score, you can look to lenders that base decisions on factors other than credit scores. Lenders like One Main Financial and Upstart will evaluate your creditworthiness based on banking records, income, and education rather than your credit score.
If you want to get a personal loan with bad credit, though, your options will be limited. Even if you do find a loan, you may find yourself paying very high interest rates and substantial fees. You may find yourself dealing with lenders that are not entirely reputable.
⚠️ If a lender advertises guaranteed approval, be wary: you are probably dealing with a predatory lender.
Your credit score plays a big role in determining your loan’s interest rate:
- Those with strong credit can get rates as low as 6%.
- Borrowers with poor credit may have rates as high as 30%.
- The average personal loan interest rate in the US is 10.71%.
Take a look at how your credit score affects the interest rate you pay.
| Credit Score | Average Interest Rate |
|---|---|
| 720-850 | 10.73% – 12.5% |
| 690-719 | 13.5% – 15.5% |
| 630-689 | 17.8% – 19.9% |
| 300-629 | 28.5% – 32% |
Source: Bankrate
This table illustrates how different rates affect the cost of a loan.
Cost of a $20,000 loan with a five-year term
| Interest Rate | 10% | 20% | 30% |
|---|---|---|---|
| Monthly Payment | $424.94 | $529.88 | $647.07 |
| Overall Cost | $25,496.40 | $31,792.80 | $38,824.2 |
These are averages, and the score you are offered may be higher or lower.
If you want to see what a loan will cost, or compare terms offered by different lenders, plug the loan terms into this loan calculator and see what your monthly payment and total interest costs will be.
What Factors Does a Lender Consider?
When you apply for any type of loan, the lender will look at your application and some personal details to determine whether to approve your loan.
There are three key factors: credit score, debt-to-income ratio, and total income.
Credit Score
Your credit score is one of the most important things that most lenders will look at. Your credit score is composed of five parts. They are, in order of importance:
- Payment history
- Amounts owed (including credit utilization rate)
- Age of credit
- Credit mix
- New credit
Payment history and the amount you owe are the most important factors. If you have a history of timely payments and have relatively little debt, it will help keep your credit score high.
Beyond that, the longer you’ve had access to credit, and the less frequently you apply for new loans, the better your score will tend to be.
Credit scores range from 300 to 850. Many lenders use these ranges:
- 300 – 579: Poor
- 580 – 669: Fair
- 670 – 739: Good
- 740 – 799: Very good
- 800 – 850: Excellent
People with excellent credit will get the best interest rates, but even those with fair credit should be able to qualify for a loan. Those with poor credit will have to look harder to find a lender willing to approve a loan.
Debt-to-Income Ratio
Your debt-to-income ratio is another key factor in your ability to qualify for a loan. This ratio measures your income compared to your monthly debt payments.
The formula for finding your debt-to-income ratio is:
Debt-to-income ratio = monthly debt payments / monthly income
👉 For example: if you make $5,000 per month and have $1,500 in debt payments each month, your debt-to-income ratio is:
$1,500 / $5,000 = 30%
A good rule of thumb is to keep your debt-to-income ratio below 43%.
Total Income
Your overall income must be sufficient to support the loan you’re applying for. If you make $5,000 monthly and have no debt, your debt-to-income ratio will be 0%, which is great. However, if you want a $1 million loan that would require a monthly payment of $6,000, no lender would approve that loan.
Conclusion
Your credit score plays a major role in your ability to get a personal loan. If you have fair or poor credit, you can still qualify, but it might require applying with multiple lenders. Your credit also plays a big role in your loan’s cost, with those who have poor credit dealing with much higher interest rates.
💡 Tip: Maintaining a good credit score will help you borrow money more easily and at a lower cost.
