The average FICO credit score in the US is currently 716. This average has shown an upward trend since the start of the COVID-19 pandemic and has continued to rise as the economy recovers from the pandemic. As many Americans made fewer purchases early in the pandemic, credit card use declined and credit scores rose. Credit values continue to rise as Americans recover from the financial impact of COVID.
To qualify for a personal loan, borrowers typically need a minimum credit rating of 610-640. However, your chances of getting a low-interest loan are significantly better if you have a “good” or “excellent” credit rating of 690 and above. The current average credit score of an approved personal loan applicant is 741.
- That National personal loan debt balance rose from $72 billion in 2015 $143 billion early 2021.
- The average personal loan The interest rate is currently 10.50.
- 19.1 million people in the US had unsecured personal loans in 2021.
- Personal loans are only considered 1% of consumer debt total.
- The average debt per personal borrower is $8,402.
- Default rates on personal loans are more than double than delinquency rates for auto loans and mortgages.
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 paying the loan each month plus interest over a set repayment period. Personal loans can be used for any purpose but are most commonly used for debt consolidation and credit card refinancing.
A debt consolidation personal loan allows you to consolidate multiple outstanding debts into one loan. That means you only have to pay one monthly fee with a flat interest rate instead of dealing with multiple lenders at once.
Debt consolidation can help borrowers manage their monthly payments. It can save you money in the long run by consolidating all of your debt under one interest rate. Debt consolidation can also improve your credit score, especially if you are consolidating outstanding credit card debt. Consolidating your credit card debt with a personal loan allows you to lower your loan utilization rate, which improves your overall credit score.
While debt consolidation and credit card refinancing are the most common uses of a personal loan, other potential uses include home improvement, major purchases, medical bills, wedding expenses, etc.
How do personal loans affect credit scores?
Taking out a loan of any kind will immediately have a slightly negative effect on your credit score as you will take on more debt. However, if you use a personal loan to consolidate or refinance debt, you can likely improve your credit score significantly over time. Additionally, paying your loan on time regularly will help you improve your credit score over time.
Pros and Cons: Personal loans work on credit
|Structure of a payment history: Timely loan payments create a positive payment history that improves your credit score.||take on debt: Every time you take out a loan, you take on additional debt. While using personal loans for debt consolidation can be a good idea, you should review your financial habits and circumstances before taking on any more debt.|
|Improving your credit mix: Having multiple types of credit helps improve your credit score. If you already have a line of credit or a credit card, an installment loan improves your credit mix and likely increases your credit score.||Additional Fees: Personal lenders can charge a variety of fees. Specific fees and additional costs vary by lender. Some examples are late fees, prepayment penalties and processing fees.|
|Reduce your credit utilization ratio: Your credit utilization ratio is a measure of your available revolving credit and how much of it you’re using. The higher this ratio, the lower your credit score. Because a personal loan is an installment loan, using it to pay off or consolidate revolving debt could improve your credit utilization.||Creating a credit request: When you apply for a loan, the lender must subject your credit report to a rigorous credit check, which initially has a negative impact on your credit score. This dip in your score lasts only a few months, applying for multiple loans can hurt your credit score. If you apply to multiple lenders, do it all within a week or two to minimize the damage to your credit score.|
|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 with bad credit: While interest rates on personal loans are on average lower than credit cards, personal loans often have high interest rate caps. Borrowers with less than stellar credit can be hit with a high interest rate, making payments harder to make.|
What credit rating is required for a personal loan?
Your credit rating is extremely important when it comes to qualifying for a personal loan, as well as what interest rate you get.
When lenders review your loan application, they want to see that you have a history of paying off your debts. Since your credit score is the primary indicator of your debt and repayment history, it is a key factor in determining whether you are eligible for a loan and how much interest you will have to pay.
The most commonly used credit score system is FICO, with scores ranging from 300 to 850. Your FICO credit score is determined based on your payment history, total outstanding debt, length of your credit history, credit mix, and new debt. have taken over. Payment history is the most important factor in determining your creditworthiness, along with your total outstanding debt.
In general, borrowers need a credit score of at least 610 to 640 to even qualify for a personal loan. To qualify for the lowest interest rate from a lender, borrowers typically need a score of at least 690.
FICO credit score and what it means for personal loans
|poor||It’s difficult to qualify for a personal loan with bad credit. If you find a lender that you qualify with, your interest rate will be high and you will likely have tighter credit limits.|
|Mass (580 – 669)||Borrowers with fair credit ratings have a better chance of qualifying for lower interest rates, but may still only qualify for low loan amounts.|
|Good (670 -739)||Borrowers with good credit are likely to receive lower interest rates from a lender and qualify for higher loan amounts.|
|Very good (740 -799)||Borrowers with excellent credit ratings qualify for the lowest interest rates from a lender and even higher loan amounts.|
|Exceptional (800+)||Borrowers with exceptional credit ratings qualify for the lowest interest rates and highest loan amounts from any lender.|
Personal loan for bad credit
The minimum credit rating required for a personal loan depends on the individual lender. Therefore, evaluate the individual requirements of the lender before applying. If you are struggling with your credit score and are looking for a personal loan, there are bad credit personal loans out there. These loans typically have more flexible requirements, and lenders consider a borrower’s overall financial history and focus less on creditworthiness.
If you are looking to get a personal loan with less than stellar credit, there are many things to consider. The lower your credit rating, the higher the interest rate on your loan is likely to be. Because a lower credit rating means higher risk for the lender, the terms of your loan are likely to be less flexible than with a borrower with a higher credit rating.
Make sure the loan terms you qualify for will work for you and that you will be able to repay the loan comfortably. Borrowers should also be on the lookout for robbery loans by verifying a lender’s credentials before applying.
Credit considerations when taking out a personal loan
When applying for a personal loan, first check your credit history and credit reports. Knowing exactly where you stand can help you better determine what interest rates you qualify for with a particular lender.
Before you decide on a lender, you should research the best personal loan rates available. You should also read the fine print for individual lenders to make sure you know exactly what you’re signing up for and whether you’ll need to pay any additional fees. Be sure to calculate what your monthly payments will be before you decide to take out a loan.
Which age group takes out the largest personal loans?
The final result
Before taking out a personal loan, make sure you know your creditworthiness and have a clear understanding of your financial situation. Consider the interest rate you’re likely to qualify for, compare the lender’s requirements and terms, and calculate what your monthly payments will be. To minimize damage to your credit score, apply to multiple lenders at the same time. Read the loan terms carefully before officially taking out the loan.
While the average credit score for an accepted loan application is quite high at 741, you can generally qualify for a loan with a score of 610 or higher. For best results, work on building your credit before taking on more debt.