People require personal loans for various reasons depending on their financial planning. A personal loan can be taken for any reason, including home renovation, consolidating debt or an unexpected expense. A credit score is a critical factor when applying for a personal loan. Any individual in the US looking to take a personal loan is generally concerned about the creditworthiness depicted by a credit score. However, the average credit score for personal loan can vary from state to state.
The average credit score required for a loan has seen an upward trend in recent months. This guide will help you discover the average credit score for personal loan and strategies to improve your creditworthiness.
What is a Credit Score?
From the American perspective, a credit score determines an individual’s creditworthiness and financial health. The average credit score in the US lies between 300 to 850 points. This score helps in categorizing the scores between excellent and poor.
The credit score is calculated based on a person’s credit report. It involves factors like payment history, length, and types of credit inquiries. It is critical to note that a higher credit score is generally needed to ensure that a person is offered a loan at a healthy interest rate by a bank or financial institution.
Do You Need Credit Score for Personal Loans?
The credit score is a significant factor undertaken by lending companies to determine the creditworthiness of an individual. A high credit score depicts the financial behavior and responsibility of an individual. A lower credit score, on the contrary, determines poor cash flows, higher credits and even defaults in the repayment of loans and interest.
When an individual applies for a loan, lenders often carry out a ‘hard’ check which could also reduce the overall credit score. Hence, too often, using it for loans and credit can result in poor credit scores.
Besides being approved for personal loans, a higher credit score also ensures that the terms of the personal loan are more favorable compared to a situation where such scores are lower. The interest rates can be lower, and the total duration of the loan could be higher, owing to the healthy credit rating of an individual.
Even though credit scores are a pretty important part of the personal loan process, it is not the only factor that lenders and banks would consider while evaluating an application. Various other factors, such as income, employment stability, and the applicant’s debt-to-income ratio, eventually determine the approval or rejection of the loan application.
What Average Credit Score is Needed for Personal Loans?
The credit score requirements cannot be categorized into different parts. It largely depends on factors such as the type of personal loan, the length and the lender’s terms and conditions. However, it is also true to understand that a higher credit score effectively helps you get a personal loan.
As a rule of thumb, many lenders consider a credit score of 670 or above as “good”. For the best terms, such as lower interest rates and higher loan amounts, a score of 740 or above is often required. If the credit score is more than 740 (and up to the highest limit), it is deemed excellent.
With a fair credit score (580-669), the lender can still provide an applicant with a personal loan. However, the repayment terms and the interest rate requirements could be much stricter than the applicants with a higher credit score. You can still get a personal loan if your credit score is lower than 580. However, the possibilities are lower compared to a situation where the credit score is fair, good or excellent.
These are just indicative and average numbers. The actual loan application process can include a few lenders specializing in providing personal loans to applicants with poor credit scores. The repayment requirements of such lenders must be stricter than the general ones. If aspects like income and existing debt obligations are good, an individual can still apply for a personal loan.
What is the Right Credit Score for Personal Loans?
Let us revisit the findings of the blog so far. First, a higher credit score is always desirable and enhances the chances of getting a loan at a given interest rate. However, there cannot be a universally accepted average credit score for a personal loan. If the credit scores are in excellent and very good ranges, the probability of loan approval increase considerably. These scores increase your likelihood of loan approval and favorable terms. However, personal loans are within reach even with a lower score.
However, there are also instances where lenders might offer you a personal loan with a higher interest rate and stricter repayment terms. Consider the purpose for which such a loan is sought in such cases. If you are seeking debt consolidations or repaying existing loans, it is critical to compare the eventual cost of current debt with the new loan and decide accordingly. However, if you need the personal loan for other purposes besides financial planning, such decisions should be postponed (if manageable), unless a favorable credit score is available.
Minimum Credit Score Required for Personal Loan
Here are the minimum credit score requirements of some personal loan lenders.
|Lender||Minimum Credit Score||Rates (APR)|
|LightStream||660||7.49% – 24.49%* with AutoPay|
|AutoPay||640||5.99% – 24.99%|
|Upgrade||580||8.49% – 35.99%|
|Upstart||580||6.12% – 35.99%1|
|LendingPoint||585||9.99% – 35.99%|
How to Build Credit for Best Personal Loans?
You must maintain a strong credit history to get better access to the best personal loans. Follow these ways to improve your average credit score for personal loan:
- Pay bills on time: If you can’t pay your bills on time, contact your credit card issuer. Ask them for the best relief methods to keep your account afloat.
- Manage credit card balances: Avoid using over 30% of your available credit. The less you use, the better your credit score is.
- Regularly check credit reports: Check your credit reports regularly. If you observe any questionable activity on your credit card, contact your creditor immediately and report the issue.
- Build credit history: Various services help you improve your credit history with bills that don’t get reported to the credit bureaus.
You must consider the importance of a credit score while applying for a personal loan. It is advised to consider other factors, like income and debt repayment schedules, along with the stability of cash flows. You can avail of a personal loan even with a low credit score but with stricter conditions. You may have an average credit score for personal loan. Eventually, it would help if you decided on your financial needs and whether to take that loan.