Key takeaways
- Qualifying for a personal loan typically requires a minimum credit score of at least 580.
- Lenders want to see that loan applicants have a history of responsibly paying debt and your credit score provides a window into your past behavior.
- Lenders want to see that loan applicants have a history of responsibly paying debt and your credit score provides a window into your past behavior.
- The most commonly used credit score system is FICO, which includes scores ranging from 300 to 850.
To qualify for a personal loan, borrowers generally need a minimum credit score of at least 580 — though certain lenders have even lower requirements than that. However, your chances of getting a low interest personal loan rate are much higher if you have a “very good” or “excellent” credit score of 740 and above.
The average FICO credit score in the U.S. is currently 717, according to recent data from FICO. That is down a point from 2023. FICO says this is the first time in a decade the average has dropped year over year. Its analysts point to the toll increased consumer debts and high interest rates have taken on Americans. A high enough credit score, however, may help you net an annual percentage rate (APR) on the lower end and help keep your payments affordable.
What credit score is needed for a personal loan?
When lenders evaluate your loan application, they want to see that you have a history of paying off your debt. Your credit score is a window into your debt and repayment history. So, it is a key factor in determining if you will qualify for a loan and how much interest you will have to pay.
The most commonly used credit score system is FICO, with scores ranging from 300 to 850. Your FICO credit score is determined based on your payment history, total outstanding debt, the length of your credit history, your credit mix and any new debt you’ve taken on. Payment history is weighed the most heavily in determining your credit score, along with your total outstanding debt.
Generally, the required credit score for a personal loan is at least 580. To qualify for a lender’s lowest interest rate, borrowers typically need a score of at least 800 and a high income.
FICO credit score and what it means for personal loans
| Poor (less than 580) | It is difficult to qualify for personal loans with a poor credit score. If you do find a lender you qualify with, your interest rate will be high and you will likely have stricter borrowing limits. |
|---|---|
| Fair (580- 669) | Borrowers with fair credit have a better chance of qualifying at all, and may receive midrange interest rates, but may still only qualify for low loan amounts. |
| Good (670-739) | Borrowers with good credit will likely receive a lender’s midrange interest rates, possibly lower, and qualify for higher loan amounts. |
| Very Good (740-799) | Borrowers with very good credit will qualify for even lower interest rates and higher loan amounts. |
| Exceptional (800 or higher) | Borrowers with exceptional credit will qualify for a lender’s lowest interest rates and highest loan amounts. |
How do personal loans affect credit score?
Taking out a loan of any kind will have a slight immediate negative impact on your credit score because you are taking on more debt and there is likely a hard credit check. However, if you use a personal loan to consolidate debt or refinance, you will likely be able to improve your credit score significantly over time.
Making regular on-time payments on your loan will also help you improve your credit score over time. Compare the pros and cons of the effect of personal loans on credit using the following table.
Pros and cons: Personal loans effect on credit
Pros
- Building a payment history: Making loan payments on time establishes a positive payment history that will improve your credit score.
- Improving your credit mix: Having multiple types of credit helps improve your credit score. If you already have a line of credit or credit card, an installment loan will improve your credit mix and likely raise your credit score.
- Reducing your credit utilization ratio: Your credit utilization ratio is the measure of your available revolving credit and how much of it you’re using. Using a personal loan to pay off or consolidate revolving debt could improve your credit utilization score.
- Lower interest rates: Personal loans generally have lower interest rates than credit cards, especially if you already have good credit. This makes it easier to make monthly payments on time and keep your credit score intact.
Cons
- Taking on debt: Every time you take out a loan, you take on additional debt. While using personal loans to consolidate debt can be a good idea, examine your financial habits and circ*mstances before taking on more debt.
- Additional fees: Personal loan lenders can charge a variety of fees. Specific fees and added charges vary by lender. Some examples include late fees, prepayment penalties and origination fees.
- Creating a credit inquiry: When you apply for a loan, the lender has to do a hard credit check on your credit report, which has an initial negative impact on your credit score for a few months. If you put in applications with multiple lenders, do it all within a week or two to minimize the damage to your credit.
- High interest rates for bad credit: While personal loan interest rates are lower than credit cards on average, personal loans often have high rate caps. Borrowers with bad or fair credit may be saddled with a high interest rate, making it more difficult to make payments.
Personal loans for bad credit
A personal loan’s minimum required credit score depends on the individual lender. Evaluate individual lender requirements before applying. If you struggle with your credit and are looking for a personal loan, look at bad credit personal loan rates. Bad credit personal loans tend to have more flexible requirements, and lenders weigh a borrower’s entire financial history with less focus on credit scores.
But beware. Lenders see a low credit score as a sign of risk. The lower your credit score is, the higher the interest rate on your loan is likely to be. The terms of your loan are likely to be less flexible than a borrower with a higher credit score.
Make sure that the loan terms you qualify for will work for you, and that you can comfortably pay back the loan. Borrowers should also look out for predatory lending by verifying a lender’s credentials before applying.
What to consider before applying
Check your credit score and credit reports when applying for a personal loan. Knowing exactly where you stand will help you better determine what rates you will qualify for with any given lender.
Before you choose a lender, shop around for the best personal loan rates available. You should also read the fine print for individual lenders to ensure you know exactly what you are signing up for, including additional fees. Be sure to calculate your loan payments before committing to a loan and make sure it is well within your budget.
The bottom line
Before taking out a personal loan, know what your credit score is and have a clear understanding of your financial picture. Consider the APRs offered, compare lender requirements and calculate your monthly payments based on what you’re eligible for.
To minimize damage to your credit score, make sure to prequalify and get all your full applications submitted within 14 days of each other. Go over the loan terms carefully before choosing the best lender for you. For the best results, you should build up your credit before taking on more debt, or seek a type of credit-building product.
