What credit score do you need to get a personal loan?

People use personal loans for a variety of reasons, including debt consolidation, paying for home improvements, and financing big purchases. Because personal loans typically aren’t secured by collateral, whether you qualify depends on your credit score. Your credit score also affects the interest rate on the loan and how much total interest you’ll pay.

With this in mind, it’s important to review your credit before applying for a personal loan. Below, we’ll explain the credit requirements for personal loans, what factors go into your credit score, and how getting a personal loan can affect your credit.

What is the minimum credit score for a personal loan?

Typically, the minimum credit score needed to get approved for a personal loan is 610 – 640, though the requirements vary by lender. To receive good rates and terms, you’ll likely need a credit score of 650 or higher. Applying for a personal loan with a lower credit score often means getting a higher interest rate.

Here are common credit score ranges and what they mean for potential borrowers:

If you’re shopping for a personal loan, it’s worth considering lenders you’ve already worked with. A previous relationship with the lender can influence the terms you receive for your personal loan. You may receive a more flexible offer if you’ve worked with the same lender in the past and established a good payment history.

Why your credit score matters when getting a personal loan

Since your credit score reflects how well you’ve managed your finances, lenders consider borrowers with a higher credit score as less risky. They charge these people a lower interest rate on loans. Borrowers with a lower credit score are charged a higher interest rate, which helps lenders compensate for any potential risk that loan payments won’t be made on schedule. This increases how much these borrowers pay in total interest.

How is your credit score determined?

Today’s system for judging individual creditworthiness involves the three credit bureaus and two credit scoring models. The credit bureaus – Experian™, Equifax®, and TransUnion® – gather data around your financial history. The credit scoring models – FICO^® and VantageScore^® – then take all the information and turn it into a number used to help evaluate where borrowers stand.

FICO^® is the credit score accepted by most lenders, while VantageScore^® is a competing system that aims to give consumers more insight into what’s affecting their score. Although not identical to the FICO^® formula, VantageScore^® is similar enough to offer actionable steps to better credit.

When you check your own credit, you’re typically getting a VantageScore^®.

What makes up your credit score and personal loan eligibility?

While the detailed formula that makes up a FICO^® Score is a bit of a mystery, you can understand the weight given to each category that goes into your score. Below are the weighted factors that affect your FICO^® Score.

1. Payment history (35%)

This one is the most straightforward: Making your monthly payments on time is good for your credit score. Payments that are 30 or more days late can hurt your score. Also included in this category are negative marks like charge-offs, collections, and bankruptcies. While charge-offs and collections stay on your report for 7 years, a bankruptcy may stay there for 7 or 10 years, depending on the type of bankruptcy you filed.

2. Amounts owed (30%)

The category with the second-highest impact on your credit score is the amounts owed on your debt. This covers revolving accounts, installment debts, and other factors.

An important area you can control is your spending on credit cards. It’s best to use your accounts regularly but not so much that it looks like you’re overextending yourself. As a general rule, you don’t want to use more than 30% of your credit limit. So, if you have a $10,000 limit, you wouldn’t want a balance of more than $3,000 at any given time.

3. Length of credit history (15%)

The length of your credit history isn’t something entirely within your control. This is a measurement of how long you’ve had open lines of credit. Typically, people who are younger have shorter credit histories because they’re just starting out on their credit journeys. Luckily, time can help improve this factor of your credit score.

4. Credit mix (10%)

Lenders want to see a mix of revolving accounts and installment loans. Revolving accounts include credit cards and home equity lines of credit. Installment loans include personal loans, car loans, student loans, and mortgages. This combination shows that you can responsibly handle different types of debt, which boosts lenders’ faith in your ability to repay your loans on time.

5. New credit (10%)

Every time you get a new loan or credit card, your credit score takes a temporary hit. However, if you make your payments when they’re due and pay balances down or off, your credit score should go back up over time.

Understanding debt-to-income ratio (DTI)

Your DTI is another important factor that has a big impact on whether you’re approved for a personal loan. DTI adds up your monthly payments on installment debt (mortgages, car payments, student loans) along with your minimum monthly payments on credit cards and other lines of credit, and compares the total against your gross monthly income. Here’s the formula:

(Installment debt payments + Revolving debt payments) / Gross monthly income

Let’s look at a quick example. Suppose you have a monthly income of $4,000. For your revolving debt, the combined minimum payment on your credit cards is $200. Your installment debt is a car payment of $300, student loan payments of $400, and a $950 mortgage payment. This makes your DTI 46.25% ($1,850/$4,000).

How a personal loan can affect your credit score

Applying for a personal loan can affect your credit score. In general, when your credit gets pulled, two types of checks can take place: soft inquiries and hard inquiries.

Soft inquiries

Soft inquiries don’t affect your credit score at all. These happen when you’re shopping around for certain types of loans, such as personal loans, and want to check your options. Soft inquiries are also used when you check your own credit.

Hard inquiries

Hard inquiries do affect your credit score. A hard inquiry is recorded any time you actually apply for a new loan or credit card. At that point, it goes to the credit bureaus and affects your score for a while.

At Rocket Loans℠, we let you check your loan options by just doing a soft credit pull. We don’t do a hard credit pull until you’re ready to move forward with your application.

FAQ about credit scores needed for a personal loan

Want to know more about credit scores for personal loans? Ponder the answers to these frequently asked questions.

What is the average credit score for a personal loan?

On average, borrowers approved for a personal loan have a credit score ranging from Good (670 – 739) to Very Good (740 – 799). You’ll likely need a score of at least 650 to get a personal loan with a good interest rate.

How can I get the best credit score for a personal loan?

Getting the best credit score for a personal loan – 700 and over – means taking steps to build up your credit. Unless you need the loan right away, it may be worth waiting until you’ve improved your credit score.

Can I get a personal loan with bad credit?

You may qualify for a personal loan with a lower credit score, but you’ll likely see less favorable interest rates and terms. Take steps to improve your credit score in order to qualify for the best possible loan terms.

The bottom line

Your credit score can make a big difference in how much you’ll pay in interest on a personal loan. Although you may still qualify with a lower score, a higher score can save you money over the long haul. For the best rates and terms, decide where your credit score needs to be and take steps to improve it.

Want to see what rates and terms you prequalify for? Start the process today with Rocket Loans^SM.