Key takeaways
- Qualifying for a personal loan typically requires a minimum credit score of at least 580.
- Lenders want to see that loan applicants have a history of responsibly paying debt and your credit score provides a window into your past behavior.
- The FICO credit score system ranges from 300 to 850, and is used by most lenders.
The average FICO credit score in the U.S. is 717, according to 2023 data from FICO. That is down a point from 2023. FICO says this is the first time in a decade the average has dropped year over year. Its analysts point to the toll increased consumer debts and high interest rates have taken on Americans. A high enough credit score, however, may help you net an annual percentage rate (APR) on the lower end and help keep your payments affordable.
To qualify for a personal loan, you generally need a minimum credit score of at least 580 — though certain lenders have even lower requirements than that. However, your chances of getting a low interest personal loan rate are much higher if you have good to excellent credit, typically a score of 740 and above.
What credit score is needed for a personal loan?
When lenders evaluate your loan application, they want to see that you have a history of paying off your debt. Your credit score is a window into your debt and repayment history. For many lenders, it is a key factor in determining if you will qualify 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, the length of your credit history, your credit mix and any new debt you’ve taken on. Your payment history and total outstanding debt are weighed the most heavily in determining your credit score, along with your total outstanding debt.
Generally, the minimum credit score for a personal loan is 580. To qualify for a lender’s lowest interest rate, you typically need a score of at least 800 and a high income.
FICO credit score and what it means for personal loans
Here’s a closer look at how FICO scores break down and how each credit score category might impact the APR for personal loans. Knowing which category your score falls into can help you better prepare for a personal loan application.
| FICO score | What it means for personal loans |
|---|---|
| Poor (less than 580) | It is difficult to qualify for personal loans with a poor credit score. If you do find a lender you qualify with, your interest rate will be high and you will likely have stricter borrowing limits. |
| Fair (580- 669) | Borrowers with fair credit have a better chance of qualifying at all, and may receive midrange interest rates, but may still only qualify for low loan amounts. |
| Good (670-739) | Borrowers with good credit will likely receive a lender’s midrange interest rates, possibly lower, and qualify for higher loan amounts. |
| Very Good (740-799) | Borrowers with very good credit will qualify for even lower interest rates and higher loan amounts. |
| Exceptional (800 or higher) | Borrowers with exceptional credit will qualify for a lender’s lowest interest rates and highest loan amounts. |
According to data collected by Bankrate on personal loan interest rates, borrowers with credit scores of 720 or higher qualified for APRs between 10.73 percent and 12.50 percent. Those with poor to fair credit saw well over double that range, with APRs between 28.50 percent and 32 percent. If you are looking to borrow a personal loan but don’t have good credit, it may be worth improving your credit score before you compare lenders.
How do personal loans affect credit score?
Taking out any kind of loan may have a slight negative impact on your credit score because you are taking on more debt and there is likely a hard credit check. However, if you use a personal loan to consolidate debt or refinance, you will likely be able to improve your credit score significantly over time.
Making regular, on-time payments will also help you improve your credit score over time. Overall, the exact effect a personal loan has on your credit will depend on how you use it and how diligent you are at repaying it.
Benefits of personal loans
Personal loans can be a good way to build your payment history, improve your credit mix and reduce your credit utilization ratio. In addition, you may be able to access lower rates than you could with a credit card.
- Building a payment history: Making loan payments on time establishes a positive payment history that will improve your credit score over the life of the loan.
- Improving your credit mix: Having multiple types of credit helps 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 raise your credit score.
- Reducing your credit utilization ratio: Your credit utilization ratio is the measure of your available revolving credit and how much of it you’re using. A debt consolidation loan for your revolving debt could improve your credit utilization.
- 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.
Drawbacks of personal loans
- Additional 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 to be sure you won’t overspend before taking on more debt.
- Variety of fees: Personal loan lenders can charge a variety of fees, with late fees and non-sufficient funds (NSF) fees being the most common. However, you may also need to keep an eye out for origination fees, which can add significant cost to your loan.
- Hard credit inquiry: When you apply for a loan, the lender has to do a hard credit check, which can have a negative impact on your credit score for a few months. This won’t last long, however, so unless you need to apply for a mortgage or other form of credit, don’t let a small drop in your score deter you.
- Potentially high interest rates: While personal loan interest rates are lower than credit cards on average, personal loans often have high rate caps. Borrowers with bad or fair credit may be saddled with a high interest rate, making it more difficult to make payments.
How to build your credit
If you’re working on improving your credit score for a personal loan, there are many steps that can help achieve this goal. Some of the most effective ways to build your credit score include reducing your debts, focusing on on-time payments and being smart about the credit you already have access to.
- Reducing debt: Keeping your debt balances below 30% of your available credit limit can improve your credit score. If you have balances above that threshold, focus on paying them down to help improve your score.
- Make on-time payments: Consistently making on-time payments on your credit cards and other loans, like a mortgage or auto loan, is one of the best ways to quickly build your credit score.
- Credit cards: Opening a credit card and using it responsibly month after month can be a great way to build your credit score. It may also help you access other benefits, such as being able to view your credit score more regularly.
- Become an authorized user: Becoming an authorized user on a family member’s credit card can also help increase your credit score without going into debt. The key is selecting a family member who has a solid credit score already and a track record of on-time payments. By becoming a user on their account, their payment history will translate to your credit profile as well.
Personal loans for bad credit
The minimum credit score to qualify for a loan depends on the lender. Evaluate individual lender requirements before applying. If you struggle with your credit and are looking for a personal loan, look at bad credit personal loan rates. Bad credit personal loans tend to have more flexible requirements, and lenders weigh a borrower’s entire financial history with less focus on credit score.
However, the lower your credit score is, the higher the interest rate on your loan is likely to be. The terms of your loan are likely to be less flexible than a borrower with a higher credit score.
Make sure that the loan terms you qualify for will work for you, and that you can comfortably pay back the loan. You should also look out for predatory lending by verifying a lender’s credentials and checking borrower reviews before applying.
What to consider before applying
Check your credit score and credit reports when applying for a personal loan. Knowing exactly where you stand will help you better determine what rates you will qualify for with any given lender.
You should also take the time to shop around for the best personal loan rates available. Read the fine print for individual lenders to ensure you know exactly what you are signing up for, including additional fees. Finally, be sure to calculate your loan payments and make sure it is well within your budget before committing to a loan.
Bottom line
Before taking out a personal loan, know what your credit score is and have a clear understanding of your overall financial health. Consider the APRs offered, compare lender requirements and calculate your monthly payments based on what you’re eligible for.
To minimize damage to your credit score, prequalify with at least three lenders. Go over the loan terms carefully before choosing the best lender for you.
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