A job loss or a costly emergency can wreak havoc on your bank account and even your creditworthiness if you are behind on your bills. If you have a less-than-perfect credit history, that doesn’t mean you should rule out getting one personal loan.
Most lenders rate borrowers based on their FICO Credit Score, the industry standard. The series fall into these five categories:
- Arm: Below 580
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Out of the ordinary: 800 and above
Lenders consider customers with scores above 670 creditworthy, according to FICO. If you have reasonable credit, you may not meet each lender’s eligibility requirements for: personal loans, but some institutions will work with you. While the process can be more challenging, you can increase your chances for success if you know what to expect and where to look.
How do you apply for a personal loan?
When you apply for a personal loan, the lender checks your credit history to measure how long you’ve had credit, how much credit you already have, how much of your available credit is being used, and your track record of paying your bills on time. And a small group of lenders are using a new type of credit score called Ultra FICO, which plays a role in your cash transaction history.
If you fall within the reasonable credit range, you may still be approved, but you will likely be charged a higher interest rate. While some borrowers may qualify for personal loans with annual rates as low as 4.99 percent, the average personal loan interest rate is 10.32 percent, according to the Federal Reserve. If you have reasonable credit, your rate will likely be on the higher side. Higher startup costs may also be charged.
Before applying for a personal loan, ask whether the lender prequalifies you. This process includes a soft credit check, which will not affect your credit score. You don’t want to accidentally take an action that further lowers your score only to find out you don’t meet the lender’s requirements.
Personal lenders for consumers with fair credit
Even though you will probably pay more for a loan if you have fair credit, you should still look for the best deal.
Check different types of lenders such as online lenders and local banks and credit unions. Federal credit unions, for example, cap interest at 18 percent. Compare the terms of the loan; while you may get a better rate from one lender, another may offer lower costs.
Here are some of your options (from February 2020):
lender Minimum credit score APR Range
Avant 580 9.95 percent to 35.99 percent
lending club 600 6.95 percent to 35.89 percent
prosperous 640 6.95 percent to 35.99 percent
Upgrade 620 6.98 percent to 35.89 percent
Upstart 620 6.53 percent to 35.99 percent
Note: Interest and credit score requirements can fluctuate, so check the lender’s website for the latest information.
What to do if your loan application is rejected?
If a lender rejects your personal loan application, keep looking. There can be other options available. Think carefully about how the payment fits into your budget and do not choose a lender with difficult conditions. Struggling to make the monthly payment could negatively impact your credit history in the future.
Take steps to recover your credit. Check your report for incorrect information and dispute any discrepancies you find. According to the Federal Trade Commission, one in five people have an error in their credit report.
Pay off debts. Lenders like to see a debt utilization ratio — the percentage of available credit you’re currently using — less than 30 percent. And be diligent to pay your bills on time.
By taking some steps to improve your credit rating, you can prepare for better interest rates in the future and one day join the 800 credit score crowd.
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