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Credit scores typically range from 300 to 850, with 300 being considered “poor” creditworthiness and 850 being considered “exceptional” creditworthiness. Fortunately, a perfect credit score of 850 is not required for most people when it comes to personal loan or credit card approval. However, there are a few other guidelines and requirements that you should know before applying for a personal loan.
Below, Select explains what a personal loan is and why your creditworthiness is important when applying for a loan and tips to increase your chances of admission.
What is a Personal Loan and Why Should You Consider One?
A personal loan is a form of credit that you can use to pay for almost any major purchase – home renovations, funeral expenses, medical bills, debt consolidation, or even unexpected emergencies if you don’t already have an emergency fund to cover the costs.
Similar to a credit card, personal loans accrue interest while you pay the balance. Unlike credit cards, however, personal loans usually have terms that allow you to repay equal amounts over a period of a few months to a few years. For this reason, personal loans are considered installment loans.
People may consider taking out a personal loan to cover an expense as they typically have lower interest rates compared to credit cards, although the interest rates can also be variable. You may also be able to obtain a personal loan larger than your credit card’s credit limit.
According to the Federal Reserve, the current average annual percentage rate for a two-year personal loan is 9.58%, while the average annual percentage rate for a credit card is 16.30%. However, using a credit card with a 0% introductory period can save you even more money, but you are likely to be subject to a shorter loan period.
In the case of personal loans, it should also be noted that early repayment of the loan may incur a processing fee or early repayment penalty. If you are new to personal loans and you know you can consistently make your monthly payments, consider opting for a loan that doesn’t charge a processing fee, such as a Discover Personal Loan.
Personal loans are also very easy to use – once you have been approved for a loan, the amount is deposited directly into your checking account and you can use the money however you want. Read our list of the best personal loans to find the right one for you.
Discover personal loans
Information about Discover Personal Loans has been independently collected by CNBC and has not been verified or provided by the bank prior to publication. Discover Bank USA is an FDIC member.
Annual percentage (APR)
Debt Consolidation, Home Improvement, Wedding or Vacation
Early withdrawal penalty
Why is Your Credit Score Important When Applying for a Personal Loan?
You need a few things before you apply for a personal loan, but the first thing you should do is check your credit history and check your credit reports. Equifax, Experian, and TransUnion, the top three credit reporting agencies, each report a different rating based on different rating models.
Your creditworthiness and creditworthiness are important as they provide guidance to lenders to determine if you think you are a responsible borrower who will repay the loan on time and in full.
“Lenders want to ask themselves, ‘If I lend you money, will you repay me?'” Said Jim Droske, president of Illinois Credit Services.
The better your credit, the more likely it is that you will get favorable terms, such as lower interest rates, on your loan. You can use a number of services to check your Equifax and TransUnion scores using the VantageScore model or use Experian to check your score based on the FICO 8 model. Note that the FICO 8 model is used in approximately 90% of credit decisions in the United States
What creditworthiness do you need for approval?
In most cases, the minimum credit score required for a personal loan approval depends on the lender. Some lenders will tell you in advance what their minimum requirements are. Payoff Personal Loan, for example, requires a FICO score of 640 or higher for approval.
While lenders can approve loans to consumers with a variety of ratings, those with higher ratings will likely find better terms.
“If you have a credit score of 760, the terms and conditions you get will be different than if you have a credit score of 580,” says Droske. “If you have a credit score of 580, a lender can still give you a loan, but they adjust the terms accordingly as you are considered a risky borrower.”
A higher credit score usually means that you can be approved for lower interest rates and more favorable credit terms.
But while your creditworthiness is an important piece of the puzzle, keep in mind that you will also need to provide some other vital information such as your annual income, employment status, social security number, and details about how you would like to avail the loan.
“Before hiring a number of different lenders to manage your credit, ask if they have a credit requirement and what it is,” says Droske. “You can also ask what scoring model they are using so that you can see for yourself if your creditworthiness is currently within the required range.”
Another option is to check with various loan providers to see if you can get pre-approved for a loan before doing a series of tough inquiries. You can use a credit comparison tool like the following to compare multiple loan offers without sacrificing your credit score.
The tool is provided and operated by Even Financial, a search and comparison engine that matches you with third-party providers. All information you provide will be passed directly to Even Financial. Select has no access to the data you have provided. Select can receive an affiliate commission from partner offers in the Even Financial tool. The Commission has no influence on the selection in the order of the tenders.
Once your loan is approved, all you have to do is sign the documents – also known as the loan “closing” – and the money will be deposited into your account and ready to use.
Can I still get a personal loan if I have a bad credit rating?
If your credit rating is on the low end and you fear this could prevent you from getting a personal loan, the good news is some lenders will still help you borrow money.
Just keep in mind that while you will be approved for a low credit personal loan, lenders will likely charge you higher interest rates, a commitment fee, an early repayment fee, and other fees. So it is a good idea to really look for a lender who offers the best terms. You want to make sure you don’t get a loan with a company that does
For example, Upstart does not charge you a fee to repay your loan early. And the company has a rate checker tool that you can use to enter your information to get an idea of what APR you would pay on your loan. This tool only does a “soft query” on your credit report so it has no impact on your credit score. However, once you actually apply for the loan, the lender will do a “hard query” on your loan and your score may be affected. Hard inquiries are done every time you apply for a new line of credit.
Upstart is a lender on Select’s Best Personal Loans list that are best for bad credit.
What can you do to increase your chances of admission?
If you are concerned that your creditworthiness is not quite what a desired lender would like it to be approved, there are a few things you can do to improve your creditworthiness so that you can go away with the personal loan that has the most affordable rates and terms .
Keep making debt payments consistently and on time. Skipping a payment or making a late payment can be a red flag for lenders. Plus, making monthly payments on time can improve your credit score (payment history accounts for a whopping 35% of your credit score).
Pay off as much existing debt as possible. Lenders want to make sure that you don’t owe more than you can afford, and your debt-to-income ratio can tell how much debt you owe in relation to your money. A high debt-to-income ratio is usually assumed to be around 36%. You can reduce your existing debt by slightly increasing the amount you add to your balance each month or by making additional payments.
Personal loans can help you cover large expenses without paying as much interest as other types of loan. Your creditworthiness is an important part of getting a personal loan approval. And while the minimum creditworthiness required for approval varies by lender, taking small steps towards maintaining healthy creditworthiness can get you closer to approval and more favorable terms.
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