Personal loans give borrowers a lot of flexibility. You could use these funds to cover an unexpected hospital bill or a home improvement project. You might even consider consolidating high-interest credit card debt. But that begs the question: “What credit score do you need for a personal loan?”
Lenders have different credit score requirements, so there's no minimum credit score for a personal loan that guarantees loan approval. However, according to the FICO® Score model, a score between 670 and 739 is considered “good,” which could help you qualify.
If you’re below this range, don’t worry — there are loan options out there for less-than-ideal credit scores. We’ll cover all the details here, starting with a quick review of how credit scores work and why they matter.
Why Lenders Check Your Credit Score Before Approving a Loan
Lenders check your credit scores to gauge your reliability and creditworthiness as a borrower. Any time you apply for a new loan — whether it’s a personal loan, credit card or mortgage — lenders gather information about you. Then they’ll decide if they want to lend you money and the terms of the agreement, such as the loan amount and interest rate.
To accomplish this, lenders typically access one or more of your credit reports. Your credit reports are statements of information about your credit history. They contain details about current and past credit accounts, including the amount you borrowed and your payment activity. There are three major consumer credit bureaus: Equifax®, Experian™ and TransUnion®.
Lenders may look at one or more of your credit scores. Credit scores are three-digit numbers, generally ranging from 300 to 850. Your scores are based on your credit reports, and they represent how likely you are to repay all of your debts. FICO® and VantageScore® are responsible for the most popular credit scoring models. These models have different calculations and weighting contributions, so they will likely vary.
Tip: Loans that don’t involve a credit check — like some payday loans and auto title loans — fall into a different category. Learn more about the pros and cons of these loans here. For many people, RISE may be a better way to borrow. RISE helps customers get the cash they need quickly and works to help them build a better financial future. Learn more about the RISE difference.
Do I Need a Good Credit Score for a Personal Loan?
Borrowers who have a history of responsible credit habits (e.g., timely payments, low balances, etc.) tend to have better credit scores. As a result, lenders view them as less risky because they’re more likely to make their repayments on time and in full. So, lenders generally offer lower interest rates and potentially larger loan amounts.
On the other hand, lenders typically offer less favorable terms — such as higher interest rates — to borrowers with less-than-stellar credit. That’s because, statistically, they’re more likely to miss payments and default on their loan.
Not sure which camp you’re in? Start by checking your credit score to see what you’re working with.
What Factors Contribute to a Credit Score?
Credit scores may seem mystical, but they’re based on numerical factors. Generally speaking, your scores can be segmented into five components. That said, scoring models assign different weights to these factors, which is partially why your scores can vary.
There’s a reason financial experts preach the importance of making on-time payments: your payment history is typically the biggest factor of your credit score. That’s because lenders want to know if you can consistently afford to pay your bills. Missed or even late payments can hurt your scores.
Amounts owed and credit usage
Although it depends on the scoring model, the amount of money you borrow is a significant scoring factor, especially relative to your available credit. This is often quantified by your credit utilization ratio.
Credit utilization is the ratio of your outstanding balances to your total available credit. For example, let’s assume you have two credit cards — both have $5,000 limits. One has an outstanding balance of $2,500, while the other has no outstanding balance. Your total credit availability would be $10,000, so your aggregate credit utilization rate would be 25% ($2,500 balance divided by $10,000).
Bottom line, the lower your credit utilization, the better.
Your credit age is the amount of time you’ve had credit. For instance, FICO® Scores consider the average age of all of your accounts, as well as the age of your newest and oldest accounts.. Patience is important here, as it can take as long as 7 to 10 years to build good credit.
Credit cards aren’t the only financial products that impact your scores. Other types of loans, such as mortgages or auto loans, can contribute to your credit mix — which is essentially the diversity of your debt. That said, you don’t need one of every loan type to boost your credit mix. Plus, credit mix usually isn’t a highly weighted factor.
If you’ve recently opened a credit account, chances are it impacted your scores. That’s because scoring models often monitor your new account activity. More specifically, they evaluate how long it’s been since you opened your last account and how many inquiries you have.
Whenever you apply for a loan, lenders typically pull one of your credit reports. This is known as a hard inquiry. But not all inquiries impact your scores. Soft inquiries, like when you check your credit, don’t show up on your credit report. Like credit mix, credit inquiries won’t necessarily tank your scores — but it’s still good to keep them in mind when you’re applying.
How to Get a Personal Loan with a Bad Credit Score
“Bad” credit is somewhat subjective, and minimum credit score requirements vary by lender. Regardless, it can be difficult to get a personal loan if your scores are below 700. However, if that applies to you, don’t worry - there are many factors in addition to credit score, and you may still qualify through other personal loan lenders’ programs. Consider the following alternative financial institutions:
Credit unions can have less stringent lending requirements than banks. So, assuming you qualify for membership, you could try going through a credit union to get a loan. If you can’t find a particular institution’s credit score minimums, you can reach out directly to a representative for more detail.
Peer-to-peer (P2P) lending platforms have grown in popularity. These sites cut traditional intermediaries — such as banks — out of the equation. Although it depends on the platform, P2P lending can have lower credit thresholds than conventional alternatives.
There are several online platforms that offer installment loans to individuals with lower credit. Some of these digital lenders don’t have minimum score requirements, assigning more weight to other factors like income.
Alternatives to Online Personal Loans
Personal loans can be used for all sorts of purchases and expenses, such as buying a car or consolidating credit card debt. But they aren’t your only loan option.
A personal line of credit may also be on the table. Unlike a personal loan, which you’d pay off in installments, a line of credit is a revolving loan. You can borrow money up until a predetermined limit. If you reach that limit, you’d have to pay down the loan to access it again — much like a credit card.
If you already have a credit card, and you’re in a financial pickle, you may be able to leverage a credit card cash advance. This feature allows you to borrow funds against your card’s limit. That said, although they’re typically less expensive than payday loans, cash advances can still be quite costly.
For starters, you typically have to pay a fee for this service. On top of that, the annual percentage rates (APRs) for cash advances are often higher than credit cards’ standard rates — which are already high to begin with. And since most cash advances don’t offer a grace period, you’ll likely accrue interest immediately. So, this may not be the most financially prudent option.
Whether you choose one of these alternative routes or stick with a personal loan, it’s important to consider the implications of applying with bad credit. Typically, a lower credit score translates to higher interest rates. Sometimes, it’s better to delay your loan application and improve your scores first.
Improve Your Credit Score Before Applying for a Personal Loan
If you don’t meet the minimum credit score required for a loan, there are ways you can improve your scores before you apply.
Fix any errors in your credit report
It’s smart to check your credit report for possible errors or inaccuracies regularly. That way, when the time comes to apply for new credit, a mistake won’t keep you from qualifying for the best personal loans with the most accommodating loan terms.
You’re typically entitled to a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) every 12 months. That said, during the COVID-19 pandemic, these entities have been providing free credit reports weekly. If you find an error, you can dispute it by phone, written letter or online.
Pay your bills on time
If you already have credit cards or other types of debt, make sure you’re covering at least the minimum monthly payments on time, every time. That said, it’s better to pay your entire statement balance when you can, as it’ll help you avoid costly credit card interest.
Timely payments can help you improve your scores, but it’s important to note that it’s not usually a quick fix. However, if you have any past-due accounts, bringing them current could have a positive impact.
Pay down your credit card debt
While it’s easier said than done, the most straightforward way to improve your credit is to pay down your existing credit card balances. By reducing your outstanding debt, you’ll lower your credit utilization ratio. There isn’t a universal credit utilization ratio that guarantees a good score, but it’s generally recommended to keep your rate below 30%.
Avoid applying for new credit cards and other loans
While you’re working on improving low credit scores, it’s best to avoid applying for new loans — regardless of type. Even if you ultimately don’t agree to the terms of your loan offers, your scores would likely take a slight hit due to hard credit inquiries.
Besides your credit scores, lenders often evaluate your debt-to-income ratio (DTI) too, which measures your monthly loan payments against your gross monthly income. This metric essentially tells a lender if you can afford more debt. So, if you take out credit cards or other loans, you could raise your DTI and make it harder to get approved for a personal loan.
Depending on your credit, you may need to take additional steps before you can apply for a personal loan. For instance, you could check your credit report for errors or create a plan to pay down your debt over the next few months. (This is a wise and responsible personal finance option even if you already have fair credit or even excellent scores.)
If you urgently need a loan, you also have the option of applying with a co-signer. This is someone who has good credit and is willing to take responsibility for the loan in the event you stop making payments.
This content provided is for educational and informational purposes only and does not constitute financial or legal advice. RISE is not acting as a credit counseling or repair service, debt consolidation service, or credit services organization in providing this content. RISE makes no representation about the reliability or suitability of the information provided – any action you take based on this content is at your own risk.