How to Qualify for Personal Loans With an Average Credit Score
Many people in the United States lack the funds to make a huge purchase, meet an unanticipated expense, or consolidate their debts. To spread the cost over time, many people get personal loans, credit cards, mortgages, and auto loans.
A 2019 Experian report found that personal loans were the fastest-growing type of credit. The longer repayment periods on personal loans mean the borrower pays less interest overall. However, many people struggle to secure personal loans because they have less than stellar credit scores.
The good news is that there are ways to increase your chances of getting approved for one, even with an average credit score.
What Is a Personal Loan?
A personal loan is granted to an individual whose qualification is determined by their credit history and income. Unlike mortgages, auto loans, and other secured loans, personal loans are easier to apply and can be used for just about anything, from minor home renovations to major purchases.
While you may be tempted to spend all your loan money at once, it’s in your best interest to borrow what you need and use the funds for necessary expenses.
Credit Score Requirements for Personal Loans
Loan providers have varying minimum credit score requirements for personal loans. Lenders usually favor those with good or excellent credit scores (690 FICO or higher), but a few will work with those with lower scores (below 630).
Even if you have an excellent credit score, there is no assurance that you will be instantly approved or get a fair interest rate. Hence, things like your creditworthiness, which is based on income and debt, are significant factors in determining whether or not you can qualify.
What is a Fair Credit Score?
A fair credit score is also called an “average credit score.” A credit score considered “fair” falls in the middle of the credit score scale, hence the term “average.” Scores can be anywhere from 300 to 850 on the FICO scale. Fair credit borrowers have a FICO score between 580 and 669, while high or excellent credit scores fall above 716.
Fair credit is close to good credit on the credit score scale, but once you cross the threshold of 670, your financial options open up exponentially.
To lenders, individuals with a “fair” credit score represent an average to high risk of default; therefore, you’ll have difficulty securing a loan.
Other Factors to Consider in Your Personal Loan Application
Though most loan providers set a credit score limit at about 600, there are still options for borrowers with fair, bad, or even no credit history. If you have an average credit rating, you can get a loan from online lenders and obtain an approved loan that could suffice your immediate financial needs.
Some online lenders offer prequalification with a soft credit check that does not affect your credit score. Make sure to check if the potential loan providers have a prequalification step by contacting them directly. Take advantage of this option and get a loan from CreditNinja.com, among others, to learn everything there is to know about the rates you can get.
Other than these, check out the following factors that could help you increase your chances of qualifying for a personal loan.
Debt-to-Income Ratio
Lenders favor borrowers with a stable monthly income that can cover their living expenses and loan payments. Although many lenders prefer a Debt-to-Income Ratio (DTI) of 36% or less, a borrower can still be approved even with a DTI of 50% as long as they fulfill the other loan requirements.
Discretionary Income
Some lenders will check the borrowers’ bank account transactions to know how much discretionary income is available after paying for essentials like food, transportation, and housing, which are not factored into the DTI ratio.
Collateral
To qualify for a secured personal loan, you must put up some valuable collateral with your lender. For example, if you’re getting a loan to buy a house or car, the collateral can be the house or the car itself. Other forms of collateral, such as cash accounts, investments, real estate, or expensive collectibles such as coins or precious metals, can be used to secure a personal loan.
When a borrower defaults on a loan, the lender can seize the collateral against it to compensate for the remaining payments.
How to Choose a Reliable Loan Provider
Research your options by comparing the terms and interest rates of various loans offered by different lenders. Traditionally, people turn to institutions like banks, credit unions, and close friends and family, but the digital world has introduced new options, such as online lenders.
It’s possible to apply for a personal loan online and review the terms and conditions at your convenience before deciding whether or not to proceed with the loan.
Your name, address, contact information, income, and reasons for obtaining the loan are the minimum information required by most lenders. Some lenders would allow you to complete the entire application process online. However, other financial institutions may insist that you submit your application in person.
Final Thoughts
In times of financial emergency, personal loans are convenient. But to qualify for a personal loan, you need to do more than just improve your credit score. Factors like your income and existing debts can also affect your application. In addition, shop around for the best rates by researching numerous loan firms and plans via the internet, the phone, and in-person visits to financial institutions.
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