What Credit Score Do You Need to Get a Personal Loan?
Some of us — at one time or another — probably had a school administrator threaten us with a blemish on our “permanent records” if we didn’t straighten up and act right.
(Come on now, don’t pretend it was just us.)
Later, of course, we learned that those records lacked permanence. However, it turns out that there really is a permanent record of which we need to be aware. Our credit histories stick with us and can have a definite effect on the quality of our lives.
Which brings us to the point of this article: what credit score do you need to get a personal loan?
How Personal Loans Work
Personal loans, also known as signature loans, are secured only by the borrower’s promise to repay them. Unlike a car loan or home loan, there is no collateral for the lender to fall back upon if the borrower defaults.
Creditors only recourses are to file a negative report with the credit scoring agencies, hound the person, and/or pursue legal action. Because of this, personal loan borrowers are held to higher standards in terms of their credit scores.
After all, a high score usually means a person is more likely to repay the debt.
How Credit Scores Work
Most financial transactions you conduct on credit get recorded by one of the big three credit reporting bureaus (Experian, Equifax, and TransUnion). The data recorded by these agencies is used to calculate your FICO score.
“FICO” is an acronym for the phrase Fair, Isaac & Company, the business entity that was created by the two guys (Bill Fair and Earl Isaac) that came up with the idea of credit scoring back in the 1950s. The algorithm FICO created in 1989 considers several factors to determine the likelihood of repayment.
These factors are:
• Payment History
• Credit Utilization
• Credit Type
• Length of Credit History
• Applications for New Credit
Because each of these factors is “weighted,” some of them have a greater impact on scoring than others. Perhaps predictably, your payment history carries a lot of weight, accounting for 35% of your score. How much of your available credit is currently used also ranks highly at 30% of your overall score. Length of history counts for 15%, while the other two factors comprise 10% each.
What is a Good Credit Score?
Depending on the ranking system in use, credit scores range from a high of 850 to a low of 300. Anything above 670 is usually considered a “good” credit score. “Excellent” credit ranges from 800 to 850. As the experts at Achieve will explain, the higher your credit score, the better the interest rate you can expect to be offered because you present less of a perceived risk to the lender.
What Credit Score is Needed for a Personal Loan?
It is entirely possible to get a personal loan with a score below 670. However, that loan will come at a significantly elevated interest rate. In other words, having less than good credit doesn’t mean you’ll be automatically rejected for a personal loan per se.
However, it does mean that loans for people with poor credit are quite expensive. This could make borrowing an ineffective strategy for debt consolidation or a similar purpose. The cost of the loan will likely outweigh the benefit of the consolidation.
You might consider offering some sort of collateral to secure the loan, or locating another source if you need to borrow and your credit score is on the softer side. Or, if at all possible, work on improving your credit score before applying for the loan.
