According to recent figures, the average FICO credit score in the US is currently 717 data from FICO. That’s down one point from 2023. FICO says this is the first time in a decade that the average has fallen year-over-year. The analysts point to the toll that increased consumer debt and high interest rates are taking on Americans.
To qualify for a personal loan, borrowers generally need a minimum credit score of 610 to 640. However, your chances of getting a low-interest loan are much better if you have a “good” or “excellent” credit score of 670. and higher.
Key statistics
- The national debt balance of personal loans rose from $72 billion in 2015 to $222 billion in the fourth quarter of 2023.
- The average personal loan interest rate for April 2024 is 12.24%.
- 22.5 million people in the US had unsecured personal loans in the fourth quarter of 2023.
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Only personal loans are good for this 1.3% of consumer debt general.
- The average debt per personal loan borrower is $11,116.
- The number of delinquencies on personal loans is more than twice as high such as payment arrears for car loans and mortgages.
What credit score is needed for a personal loan?
When lenders review your loan application, they want to see that you have a history of paying off your debts. Your credit score is a window into your debt and repayment history. So it is a key factor in determining whether you qualify for a loan and how much interest you will have to pay.
The most commonly used credit scoring system is FICO, with scores ranging from 300 to 850. Your FICO credit score is determined based on your payment history, total outstanding debts, the length of your credit history, your credit mix, and any new debt you have. have accepted. Payment history is weighted most heavily in determining your credit score, along with your total outstanding debt.
Generally, borrowers need a credit score of at least 610 to 640 to even qualify for a personal loan. To qualify for a lender’s lowest interest rate, borrowers typically need a score of at least 800.
FICO credit score and what it means for personal loans
| Arm | It is difficult to qualify for personal loans with a bad credit score. If you find a lender you qualify for, your interest rate will be high and you will likely have stricter borrowing limits. |
| Fair (580 – 669) | Borrowers with fair credit are more likely to qualify for a lower interest rate, but may still only qualify for low loan amounts. |
| Good (670 -739) | Borrowers with good credit are likely to receive a lender’s lower interest rates and qualify for higher loan amounts. |
| Very good (740 -799) | Borrowers with very good credit qualify for the lowest interest rates from a lender and even higher loan amounts. |
| Exceptional (800+) | Borrowers with exceptional credit qualify for the lowest interest rates and highest loan amounts from any lender. |
What is a personal loan?
A personal loan is an unsecured amount of money that you borrow from a bank, credit union or online lender.
Once you receive the loan funds, you begin making monthly payments on the loan, plus interest, over a set repayment period. Personal loans can be used for any purpose, but are most commonly used to consolidate debt and refinance credit cards.
Using a personal loan to consolidate debt allows you to combine multiple outstanding debts into one loan. This means you only have to pay one monthly amount with one consistent interest rate, instead of having to deal with multiple lenders at the same time.
Debt consolidation can help borrowers keep their monthly payments under control. Combining all your debt under one interest rate can save you money in the long run. Debt consolidation can also improve your credit score, especially when you consolidate outstanding credit card debt. By consolidating your credit card debt with a personal loan, you can lower your credit utilization rate, improving your credit overall.
While debt consolidation and credit card refinancing are the most common uses of a personal loan, other possible uses include home improvements, major purchases, medical bills, wedding expenses, etc.
How do personal loans affect credit score?
Taking out a loan of any kind will have a small immediate negative impact on your credit score because you will be taking on more debt. However, if you use a personal loan to consolidate or refinance debt, you will likely be able to significantly improve your credit score over time. Additionally, making your loan payments on time regularly will help you improve your credit score over time. Compare the pros and cons of how personal loans affect credit below.
Pros and cons: Personal loans affect credit
| Plus points | Cons |
| To build a payment history: Making loan payments on time will create a positive payment history that will improve your credit score. | 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 circumstances before taking on more debt. |
| Improve your credit mix: Having multiple types of credit can help you 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 increase your credit score. | Extra cost: Personal loan providers may charge different fees. Specific fees and additional charges vary by lender. Some examples include late fees, prepayment penalties, and origination fees. |
| To reduce your credit utilization ratio: Your credit utilization ratio is the measure of your available revolving credit and how much of it you use. The higher this ratio is, the lower your credit score will be. Because a personal loan is an installment loan, using it to pay off or consolidate revolving debt can improve your credit utilization score. | To create a credit application: When you apply for a loan, the lender must perform a hard credit check on your credit report, which initially negatively affects your credit score. This dip in your score only lasts a few months, applying for multiple loans can damage your credit. If you are applying to multiple lenders, do them all within a week or two to minimize the damage to your credit. |
| 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. | High interest rates for bad credit: Although interest rates on personal loans are on average lower than credit cards, personal loans often have high interest rate limits. Borrowers with less than excellent credit can be saddled with high interest rates, making it more difficult to make payments. |
Personal loans for bad credit
The minimum required credit score for a personal loan depends on the individual lender. Evaluate the requirements of individual lenders before applying. If you’re struggling with your credit and are looking for a personal loan, look into bad credit personal loans. These loans typically have more flexible requirements, and lenders consider a borrower’s entire financial history, with less attention to credit scores.
But watch out. Lenders see a low credit score as a sign of risk. The lower your credit score is, the higher the interest on your loan is likely to be. The terms of your loan are likely to be less flexible than those of a borrower with a higher credit score.
Make sure the loan terms you qualify for work for you and that you can comfortably repay the loan. Borrowers should also watch out for predatory lending by verifying a lender’s credentials before applying.
Credit considerations when obtaining a personal loan
Check your credit score and credit reports when applying for a personal loan. If you know exactly where you stand, you can better determine what rates you qualify for with a particular lender.
Before choosing a lender, shop around for the best personal loan rates available. Also read the fine print of individual lenders so you know exactly what you are signing up for, including the additional costs. Make sure you calculate how much your monthly payments will be before taking out a loan.
Which age group takes out the largest personal loans?
This is how you compare personal loans
There are many variables to consider when comparing personal loans. Factors to look at include:
- April: This is the interest rate you can expect to pay, usually a percentage of the principal amount of the loan.
- Secured vs. Unsecured: It is often easier to qualify for secured personal loans because they require collateral, which is an asset in securing the loan. Mortgages and car loans are examples of secured debt, as the loan is secured by the home or vehicle. Unsecured debts may have higher interest rates but do not require collateral, which can be seized if you don’t pay.
- Loan term: This is the period in which you can expect to make repayments. Typical loan terms for personal loans are two to five years, but some can last as long as seven years. The shorter the term of the loan, the lower the APR.
- Cost: Most personal loans come with fees, which are added to your principal and increase the amount you owe. Be sure to read the fine print of your loan to understand how much you can expect to pay at origination, payment processing, late payments, and prepayment penalties.
- Joint loans: If you don’t have a very strong credit history, you may be able to get a joint loan with a co-borrower. This type of loan can increase your chances of approval, but keep in mind that your co-borrower is also responsible for the loan.
it comes down to
Before taking out a personal loan, make sure you know your credit score and have a clear understanding of your financial situation. Consider the interest rate you’re likely to qualify for, compare lenders’ requirements and terms, and calculate your monthly payments.
To minimize the damage to your credit score, apply to multiple lenders within the same two-week period. Read the loan terms carefully before officially taking out the loan. For the best results, build your credit before taking on more debt, or look for some type of credit-building product.
