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Credit scores typically range from 300 to 850, with 300 being indicative of “poor” credit and 850 of “great” credit score requirement. To most people’s relief, a credit score of 850 or higher is not required in order to be approved for personal loans or credit cards. However, you need to be aware of a number of other guidelines and prerequisites before you can submit an application for a personal loan.
In the following sections, Select will explain what a personal loan is, why it is important to have a good credit score when applying for one, and how you may enhance your chances of getting approved for the loan.
What is a personal loan, and why might you need one?
You can use a personal loan to pay for almost any significant expenditure, including home improvements, funeral costs, medical bills, debt consolidation, and even unanticipated emergencies if you do not already have an emergency fund that can cover the cost. If you do not already have an emergency fund that can cover the price, you can use a personal loan.
Similar to how interest is accrued on a credit card debt, personal loans do so when the balance is paid down. In contrast to credit cards, personal loans often come with terms that allow you to spread out your repayment over a period of time anywhere from a few months to a few years, and keep your payments the same amount each month. As a consequence of this, personal loans are considered to be installment loans.
People could consider obtaining a personal loan to pay for an item since, on average, the interest rates associated with personal loans are lower than those associated with credit cards, even though the rates can still be changeable. In addition, there is a possibility that you could qualify for a personal loan with a higher credit limit than the one associated with your credit card.
According to data provided by the Federal Reserve, the average annual percentage rate (APR) for a credit card is now at 16.30%, while the average APR for a personal loan with a term of two years is 9.58%. But if you use a credit card that has an introductory period of 0% annual percentage rate (APR), you could be able to save even more money, even though you’ll probably have to use the card for a shorter period of time at first.
When you try to get a personal loan, why does your credit score matter?
You will need to acquire a few materials before you apply for a personal loan, but the first thing you should do is check your credit scores and credit reports. Equifax, Experian, and TransUnion are the three major credit bureaus in the United States, and each of them reports a different score based on their own unique scoring methodology.
Your credit history as well as your credit ratings are extremely important because they provide information that creditors can use to determine whether or not they believe you will be a trustworthy borrower who will repay the loan on time and in full.
“Lenders want to ask themselves, ‘If I lend you money, will you pay me back?’” says Jim Droske, president of Illinois Credit Services. “Lenders want to know whether or not borrowers have the ability to repay loans.”
How much credit do you need to get approved?
When applying for a personal loan, the minimum credit score that is required to get approved might often vary from lender to lender. There are certain lenders who will be very forthright about what their minimum requirements are. For instance, the Payoff Personal Loan necessitates a FICO score of 640 or higher in order to get approved.
Although financial institutions may provide loans to clients with a variety of credit ratings, the terms of the loans will most likely be more beneficial for clients with higher credit scores.
According to Droske, the difference between having a credit score of 760 and 580 will result in various terms being offered to you by lenders. If your credit score is 580 or lower, it is possible that you will still be approved for a loan; however, the terms of the loan may be altered because the lender will see you as a riskier borrower.
If you have a higher credit score, you will normally have a better chance of being approved for loans with better terms and cheaper interest rates.
Although your credit score is an essential piece of the puzzle, you will also be required to provide some other vital details, such as your annual income, employment status, social security number, and information on how you intend to use the loan. In addition, you will be required to provide information on how you intend to use the loan.
If I have bad credit, can I still get a personal loan?
If your credit score is on the lower end and you are worried that it will prevent you from receiving a personal loan, you should know that there are still some lenders who would let you borrow money from them.
Be aware, however, that even if you apply for and are approved for a personal loan despite having bad credit, the interest rate you pay, the fees associated with paying off the loan early, and any other penalties that may be applicable will almost certainly be higher. Therefore, it makes perfect sense to investigate numerous lending options in depth in order to find the financial institution that offers the most favorable conditions. Make it a point to avoid taking a loan from any company or institution that
How can you improve your chances of being accepted?
If you are concerned that your credit score may not be quite where a potential lender would like it to be in order to approve you for a loan, there are a few things you can do to boost it that are within your control. If you follow these steps, you will be able to secure a personal loan with favorable interest rates and repayment terms.
Maintain a pattern of paying your bills on time and in a consistent manner. If a payment is missed entirely or is made late, the lender may become anxious. In addition, although your history of making payments accounts for a significant portion (35%) of your credit score, being prompt with your monthly payments might actually help you boost that score.
Pay down any existing debt to the greatest extent that you can. Lenders want to make sure that you are not taking on too much debt in comparison to your income, so they will look at your debt-to-income ratio to get an idea of how much debt you have and how much income you make. A debt-to-income ratio that is greater than 36 percent is frequently considered to be problematic. You might be able to reduce the total amount of debt you currently owe if you make additional payments or if you raise the amount that you pay toward your balance on a monthly basis by a little amount.
