The average FICO credit score in the United States is currently 716. This average has trended upward since the onset of the COVID 19 pandemic and has continued to rise as the economy recovers from the pandemic. With many Americans making fewer purchases at the start of the pandemic, credit card use declined and credit scores rose. Now that Americans are recovering from the financial effects of COVID, credit ratings continue to rise.
To qualify for a personal loan, borrowers generally need a minimum credit score of 610 to 640. However, your chances of getting a low interest loan are much higher if you have a credit score of “good” or “excellent” credit of 690. and above. The current average credit score of an approved personal loan applicant is 741.
- the national debt balance on personal loans Pink from $72 billion in 2015 to $143 billion early 2021.
- The average personal loan the interest rate is currently 10.50.
- 19.1 million people in the United States had unsecured personal loans in 2021.
- Personal loans represent only 1% of consumer debt globally.
- The average debt per personal loan borrower is $8,402.
- Personal loan delinquency rates are more than twice as high than delinquency rates for car loans and mortgages.
What is a personal loan?
A personal loan is an unsecured sum of money that you borrow from a bank, credit union, or online lender.
Once you receive the loan funds, you begin making monthly loan payments, plus interest, over a set repayment period. Personal loans can be used for any purpose, but they are most often used to consolidate debts and refinance credit cards.
Using a personal loan to consolidate debt allows you to combine multiple outstanding debts into one loan. This means you only have to pay a monthly fee with a constant interest rate, instead of dealing with multiple lenders at the same time.
Debt consolidation can help borrowers get their monthly payments under control. It can save you money in the long run by combining all your debts under one interest rate. Debt consolidation can also improve your credit score, especially when you consolidate unpaid credit card debt. Consolidating your credit card debt with a personal loan allows you to lower your credit utilization rate, which improves your credit overall.
While debt consolidation and credit card refinancing are the most common uses for a personal loan, other potential uses include home renovations, major purchases, medical bills, wedding expenses, and more.
How do personal loans affect credit score?
Taking out any loan will have a slight immediate negative impact on your credit score as you take on more debt. However, if you use a personal loan to consolidate debt or refinance, you will likely be able to significantly improve your credit score over time. Plus, making regular, on-time payments on your loan will help improve your credit score over time.
Advantages and disadvantages: personal loans affect credit
|Build a payment history: Paying off your loan on time establishes a positive payment history that will improve your credit score.||Get into debt : Every time you take out a loan, you take on additional debt. Although using personal loans to consolidate debt can be a good idea, consider your financial habits and situation before taking on more debt.|
|Improve 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 will improve your credit mix and likely increase your credit score.||Additional costs: Personal lenders may charge a variety of fees. Specific fees and additional charges vary by lender. Some examples include late fees, prepayment penalties, and set-up fees.|
|Reduce your credit utilization rate: Your credit utilization rate is the measure of your available revolving credit and how much of it you are using. The higher this ratio, the lower your credit rating will be. Since a personal loan is an installment loan, using it to pay off or consolidate revolving debt could improve your credit utilization score.||Creating a credit application: When you apply for a loan, the lender must perform a thorough credit check on your credit report, which has an initial negative impact on your credit score. This drop in your score only lasts for a few months, applying for multiple loans can hurt your credit. If you’re filing with multiple lenders, do it all in a week or two to minimize damage to your credit.|
|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 for bad credit: Although personal loan interest rates are lower than credit card interest rates on average, personal loans often have high rate caps. Borrowers with less than excellent credit may face high interest rates, making it more difficult to pay.|
What credit score is needed to get a personal loan?
Your credit score is extremely important when it comes to qualifying for a personal loan as well as the interest rate you receive.
When lenders assess your loan application, they want to see if you have already paid off your debt. Since your credit score is the primary indicator of your debt and repayment history, it’s a key factor in determining whether you’ll qualify for a loan and how much interest you’ll 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, your credit composition and any new debt you have. have taken. Payment history is most important in determining your credit score, as well as your total outstanding debt.
Generally, borrowers need a credit score of at least 610 to 640 to even qualify for a personal loan. To qualify for a lender’s lowest interest rate, borrowers generally need a score of at least 690.
FICO Credit Score and What It Means for Personal Loans
|Poor||It is difficult to qualify for personal loans with a bad credit score. If you find a lender you qualify with, your interest rate will be high and you will likely have tighter borrowing limits.|
|Just (580 – 669)||Borrowers with fair credit are more likely to qualify for lower interest rates, but may still qualify for low loan amounts.|
|Good (670 -739)||Borrowers with good credit are likely to benefit from a lender’s lower interest rates and qualify for higher loan amounts.|
|Very good (740 -799)||Borrowers with very good credit will qualify for a lender’s lowest interest rates and even higher loan amounts.|
|Outstanding (800+)||Borrowers with exceptional credit will qualify for the lowest interest rates and highest loan amounts from a lender.|
Personal loans for bad credit
The minimum credit score required for a personal loan depends on the individual lender, so assess each lender’s requirements before applying. If you are struggling with your credit and are looking for a personal loan, there are bad credit personal loans available. These loans tend to have more flexible requirements, and lenders assess a borrower’s overall financial history with less focus on credit scores.
If you’re looking to take out a personal loan with less than stellar credit, there’s a lot to consider. The lower your credit score, the higher the interest rate on your loan is likely to be. Because a lower credit score means more risk for the lender, your loan terms are likely to be less flexible than a borrower with a higher credit score.
Make sure that the loan terms you qualify for suit you and that you will be able to comfortably repay the loan. Borrowers should also watch out for predatory lending by checking lender credentials before applying.
Credit Considerations When Getting a Personal Loan
When applying for a personal loan, start by checking your credit score and credit reports. Knowing exactly where you stand will help you better determine the rates you will qualify for with a given lender.
Before choosing a lender, 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 have to pay any additional fees. Be sure to calculate your monthly payment amount before committing to a loan.
Which age group takes out the biggest personal loan?
The bottom line
Before taking out a personal loan, make sure you know your credit score and have a clear understanding of your financial situation. Consider the interest rate you’re likely to qualify for, compare lender requirements and terms, and calculate your monthly payment amounts. To minimize damage to your credit score, apply to multiple lenders within the same time frame. Carefully review the terms of the loan before formally taking out the loan.
Although the average credit score of a successful loan application is quite high at 741, you can usually qualify for a loan with a score of 610 or higher. For best results, you should work on building your credit before taking on more debt.