Advertiser Disclosure

Personal Loans

What Credit Score Do I Need for a Personal Loan?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

checking credit score for personal loan
iStock

Most people know their credit score is a three-digit number that represents their credit health, but that doesn’t mean they know how their credit score is determined or why it’s so important. Many consumers also fail to realize they have some power over their credit scores, including the ability to improve their score time.

If you’re wondering about the credit score needed for a personal loan, it’s crucial to understand the inner workings of your credit score and how it might impact your ability to qualify for the cash you need.

In this guide, we offer up information on the minimum credit score required for a personal loan, along with additional details on credit scores and where you can get yours for free.

What is a credit score?

While the term “credit score” is used widely to describe the score you’re assigned based on your creditworthiness, there are several different types of credit scores available. The most popular credit score is the FICO Score, which was created by the Fair Isaac Corporation. This score, measured on a scale from 300 to 850, is used by 90% of lenders who are making credit-related decisions each year, according to FICO.

VantageScore is the biggest competitor to FICO and its most current version, V3, uses the same 300-850 range of scores to describe consumer creditworthiness. Other credit scores include TransRisk, Experian’s National Equivalency Score, CreditXpert Credit Score, CE Credit Score, and Insurance Score.

While each type of credit score works differently, they all consider a similar set of information to determine where you stand. The big differences between them are based on how much weight they give each factor they compare.

As an example, the FICO scoring model uses the following criteria to determine your credit score:

  • Payment history: 35%
  • Debts/amounts owed: 30%
  • Age of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

With Vantage Score, on the other hand, different factors play a larger role in the score you’re assigned. Look how Vantage Score is determined, and you’ll see what we mean:

6 factors in your VantageScore

Factor

Weight

Age and type of credit

Extreme

Credit utilization (amounts owed)

Extreme

Payment history

High

Total balances

Medium

Recent behavior

Low

Available credit

Extremely low

If you don’t know your credit score but want to find out what it is right now, you can get your free credit score using My LendingTree. The services help you monitor your credit and find ways to improve it.

Some credit cards, like the Discover it® Cash Back, provide a free FICO® score on your monthly statement as a cardholder perk. You can also get your FICO® score for free with a service called Credit Scorecard. This service is available to you whether you are a Discover customer or not.

How do banks use credit scores?

When you apply for a personal loan, your lender will pull one of your credit scores from at least one of the credit reporting agencies — Experian, Equifax, or TransUnion. At that point, they will take a close look at your score to determine your creditworthiness.

“Credit scores are used to determine the risk of doing business with an applicant,” said credit expert John Ulzheimer. “If your score or scores are good enough and you have a sufficient income, then you’re likely to be approved.”

Keep in mind, however, that your credit score is only one factor a lender will consider when deciding whether to approve you for a personal loan.

“Banks also look at your entire credit report, your debt-to-income ratio (DTI), employment history, any items you own that can be used as collateral, and so on,” said Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.

In summary, you will likely need to have more than a sufficient credit score for a personal loan if you hope to qualify. You will also need to have a proof of income and employment, an acceptable debt-to-income ratio (a DTI below 35 percent is a good goal to shoot for), and a solid credit history that shows you have used credit responsibly in the past.

What credit score is needed for a personal loan?

When it comes to minimum credit score requirements for personal loans, there is no hard and fast rule. According to myFICO.com, a credit score of 670 or above is generally considered “good” and acceptable. This means that an applicant who applies for a personal loan with a score of 670 may qualify, but they may or may not receive the best interest rate or terms.

But that doesn’t mean a consumer with a credit score of 620 can’t get a loan, said Harzog; “it just means that the interest rate will be high.”

That’s because, generally speaking, those with low credit scores usually pay much higher interest rates if they can qualify for a loan. However, the opposite is also true since a high credit score will usually get you a loan with the lowest interest rates and best terms.

How much will your interest rate vary based on your credit score? That depends on your lender, where you live, and other factors. For example, at Wells Fargo, a $5,000 personal loan with a repayment period of sixty months offers the following rates based on a calculator they offer on their website as of November 14, 2018:

  • Excellent credit (score of 760 or above): 11.49% to 13.74%
  • Good credit (score of 700 to 759): 11.49% to 18.49%
  • Fair credit (score of 621 to 699): 18.49% to 24.49%
  • Poor credit (score of 620 or below): 19.99% to 24.49%

In terms of transparency, not all lenders offer the type of detail Wells Fargo does with their loan payment calculator. While some lenders list their credit score requirements online, others remain vague or refuse to commit to a minimum credit score cutoff altogether.

For example, Goldman Sachs Bank USA lists that only consumers with “excellent credit” qualify for their personal loans with the lowest rates, but they don’t list a minimum credit score requirement or explain their minimum cutoff for a great credit score. On the other hand, student loan refinance company and personal loan lender Earnest lists directly on their website a minimum credit score requirement of 680.

If you’d like to explore personal loan options, you can use this tool from LendingTree to see offers from up to five different lenders. You’ll input information about yourself and what you want out of a loan. If you qualify, the tool with spit out lender offers you can review.

As you begin comparing lenders for a personal loan, it’s important to keep in mind that credit score requirements, interest rates and transparency about internal processes will vary greatly. Ulzheimer also said that requirements also vary by lender since some “target a higher risk population.”

“For some lenders, a 580 may be good enough,” he said. “It’s not uniform.” (You can see personal loans for bad credit here.)

What can you do if your credit score is too low for a loan?

If you can’t qualify for the personal loan you want, it’s crucial to be aware of some of the risks that come with personal loan alternatives. Payday loans and title loans may make it easy to access cash, but they do so at an exorbitant cost. Interest rates on payday loans can surge up to 780% when you factor in fees, and title loans can lead to you having your car repossessed if you don’t pay them back in full when they’re due.

Consequently, it’s smart to avoid borrowing money unless you absolutely must.

“If you’re in a position where you need to rebuild your credit, it’s not a good idea to take on more debt,” said Harzog. “Instead, you should take some steps to improve your credit score over time, such as paying down debt to decrease your utilization, making sure all your bills are paid early or on time, and refraining from opening or closing accounts while you try to boost your score.

Harzog also noted that you should check your credit report for free with all three credit reporting agencies on AnnualCreditReport.com. If you find a negative note on your report that is inaccurate and take the time to dispute it, this could help your credit score tremendously.

In lieu of taking the time to improve your credit score before you apply for a loan, here are a few additional options to consider:

  • Get quotes from bad credit lenders. While lenders who focus on people with bad credit should be an option of last resort, you can consider them. Just remember that you may pay an extremely high interest rate if your credit is poor. With NetCredit Personal Loans, for example, your APR could be as high as 155.00%.
  • Get a cosigner. If you’re able to convince a family member or trusted friend with great credit to cosign on your loan, you could have a better chance at qualifying with a lower interest rate.
  • Apply for a secured loan. Secured loans require you to put down collateral, but they tend to offer lower rates and may be easier to qualify for. If you have home equity you can borrow against, a car that is paid off, or a retirement account with a healthy balance, for example, you may be able to take out a secured loan.
  • Borrow from family and friends. If a lender won’t give you the time of day or you want to avoid high interest rates, you can also try borrowing money from family or friends. Just make sure you have the means to pay your loan back — if you default and blow them off, you risk jeopardizing your relationship.
LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Personal Loans

Top 5 Personal Loan Myths of 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

personal loans
iStock

When it comes to personal loans, many Americans are more likely to turn to credit cards as a way to pay emergency bills, enjoy a dream vacation, or pay for items they can’t afford with cash.

According to Experian, existing personal loan debt was at $273 billion in the second quarter of 2018, while existing credit card debt was at $782 billion in the same period.

But it also shows personal loans with a greater year-to-year change in debt growth than credit cards. Whether personal loans are a viable option for expenses depends, apparently, on who you ask.

Awareness seems to be a key factor. When people are in the dark about financial solutions, they will draw their own conclusions, often leading to false perceptions.

What are some of the myths about personal loans?

5 things people say about personal loans

Myths about personal loans have developed over two centuries, making them hard to debunk.

Fortunately, the internet makes it easier than ever to not just raise awareness about personal loans and to clarify misconceptions, but to find the lowest interest rates and apply for loans.

Personal loans have a difficult and lengthy application process

Before the internet, borrowers had to apply for a personal loan by visiting their bank. During the days of the Morris Plan banks, they often evaluated borrowers based on character and income. This may have meant dressing in your Sunday best and arriving for a meeting with a loan officer with stacks of paperwork, pay stubs and tax returns.

Today, applying for a personal loan is easier than applying for a home equity loan or a mortgage.

You can apply easily online in just a few clicks. Many lenders will ask you to provide your Social Security number, your monthly expenses — including any outstanding debt such as mortgages, car loans, student loans and credit card debt — and your income.

Keep in mind that applying for a personal loan may require a hard credit inquiry and could lower your credit score. If you can, try to pre-qualify for a loan before you apply.

You won’t qualify for a personal loan if you don’t have excellent credit

This common misconception couldn’t be further from the truth. Personal loans are available for borrowers with a FICO Score as low as 500, but you won’t get the best rates with a rock-bottom credit score.

Most lenders look for borrowers with a credit score of 670 or higher. But a score of 800 or more will net you the best terms and interest rates.

Personal loans have lower interest rates than credit cards

Unlike the other myths explored, this one has some truth to it. It all depends on your creditworthiness.

Borrowers with a credit score of 720 or higher get personal loans at an average APR of 7.09%, according to LendingTree data, which is lower than the current 14.73% average APR for credit cards. (Disclosure: MagnifyMoney is owned by LendingTree.)

But if your credit is between 660 and 679, the average APR for a personal loan jumps to 16.72%.

It might be smarter to open a credit card with a 0% introductory APR for balance transfers and pay down as much debt as you can during that introductory period. With on-time payments, your credit score will rise and you can continuing using the same process until your high-interest debt is paid off.

Personal loans have high interest rates

“Personal loans have high interest rates” and “personal loans have lower interest rates than credit cards” might seem to be contradictory misconceptions.

In fact, they show just how much confusion there is about personal loans. Some people perceive the rates to be too high, while others assume a personal loan will offer a lower interest rate than their existing credit card debt.

There is just not enough awareness about personal loans being a good option for many people.

So what’s the truth?

If you have an excellent credit score, you could qualify for a personal loan with single-digit interest rates, which is lower than most credit cards.

Personal loans are also a better option than predatory payday loans, which can have an APR of almost 400%.

But if you own a home, a secured loan such as a home equity loan or home equity line of credit will almost certainly deliver a lower interest rate than an unsecured personal loan.

Personal loans just aren’t right for many borrowers

Many people don’t think of themselves as a good candidate for a personal loan. Maybe they feel their credit isn’t good enough or they don’t make enough money to quality.

Homeowners often consider home equity loans or HELOCs before personal loans. And, of course, the 70 million Americans carrying credit card debt month to month may not have thought about a personal loan.

But you could be a good candidate for a personal loan if you have excellent credit and need cash to consolidate credit card debt, pay medical bills or make a large purchase.

With an easy online application process, personal loans are increasingly becoming a smart choice for many borrowers.

What are your personal loan options?

In spite of the myths surrounding them, personal loans continue to grow in popularity.

In the second quarter of 2018, personal loans showed the greatest year-over-year growth than any other type of loan, according to Experian. Personal loan debt increased by 11.4%.

Borrowers looking for cash to pay off revolving credit cards or remodel their home may want to consider a personal loan. If you’re considering a personal loan, check your credit reports from all three credit bureaus and repair any errors to be sure your credit is in tip-top shape so you can qualify for a lower interest rate.

If your score isn’t where you’d like it to be, take time to pay down existing debt to improve your credit utilization ratio and raise your credit score. Avoid opening or closing accounts before applying for a personal loan since these actions could reduce your score.

As your credit score is increasing, use the MagnifyMoney personal loan marketplace to find a loan with the lowest rates and best terms for your situation. Always remember to do your research, consider all your options and make sure your finances are in order before applying for a personal loan.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dawn Allcot
Dawn Allcot |

Dawn Allcot is a writer at MagnifyMoney. You can email Dawn here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Personal Loans

Loan Origination Fees: Should I Be Paying Them?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

girl with a cup of coffee with a money bag symbol
iStock

If you’ve applied for a personal loan or mortgage, chances are you probably came across something called an origination fee. If you’re wondering what it’s for and whether you have to pay it, here’s what you need to know.

Understanding origination fees

An origination fee is a common charge that is added to a personal loan, student loan or mortgage. It is charged by the lender and can also be referred to as an application, processing or underwriting fee. Its purpose is to cover the hard costs of preparing documents, processing and underwriting your loan, and any third party fees that might be incurred along the way, said Ashley Luethje, a York, Neb.-based sales manager at Waterstone Mortgage.

“These fees are typically a percentage of the total amount you’re borrowing,” Luethje said. “Generally, a mortgage origination fee is around one percent, but for consumer and commercial loans, the fee can be greater and is at the discretion of the lender.”

How an origination fee can come into play

If you’re deciding between lenders, one criteria you might want to take into account is the difference in their origination fees. There are some key points to consider, depending on the type of loan you’re applying for.

Personal loan

As personal loans are typically unsecured and not backed by any collateral, you may find the highest origination fees in this category. Because these types of loans carry more risk for lenders, they may charge you anywhere between 1% to 6% of the total amount you are borrowing. Those higher fees also offset the lower amount of interest lenders like banks and credit unions will receive during the life of a personal loan. These loans tend to be extended for a shorter term and in smaller amounts than other kind of loans.

If you’re not getting charged an origination fee with your personal loan, be aware that the lender may make up for it some other way, such as charging higher interest rates, said Jacob Dayan, the Chicago, Ill.-based CEO and co-founder of Community Tax and Finance Pal.

“It’s important to note that having a good credit history will yield you a much lower origination fee,” Dayan said. “Those fees are negotiable for larger loans, but will commonly require you to put up something, such as accepting a higher Annual Percentage Rate (APR) on your loan.”

Mortgage

Mortgage origination fees — also called mortgage points — can vary drastically as they are determined by the lender, said Jason Larkins, a Scarborough, Maine-based branch manager at United Fidelity Funding. These fees are charged to cover the labor involved in the processing, underwriting and funding of a mortgage, as well as third party fees incurred in tasks such as verifying your employment.

Many lenders, such as banks, credit unions and brokerages, charge a flat origination fee. This means the fee is not based on the amount you borrow. Others could charge a 0.5% to 1% origination fee; the VA home loan program sets a cap at 1%. “However, if a borrower is paying a 1% origination fee, they are likely paying too much and can shop for a better deal,” Larkins said.

At the beginning of the mortgage application process, lenders must disclose the exact origination fee being charged in an official Loan Estimate form. Lenders may not increase the stated fee except under special circumstances, such as if you decrease your down payment or change your type of loan. However, you could negotiate it downwards depending on your credit score, and the size and duration of your requested loan.

As long as you meet certain criteria outlined in IRS Publication 530, your mortgage origination fees may also be tax deductible.

Student loans

Origination fees for federal student loans are set by the government and may vary depending on whether you have a direct subsidized, direct unsubsidized or direct plus-type loan. Those fees could range from 1.062% to 4.264%  and are deducted from the loan amount — meaning you get a smaller loan in the end but will still pay back the full amount. For example, if you were to take out a $10,000 loan with a 4% origination fee, you would only receive $9,600 but would have to pay back the entire $10,000.

The only federal student loans that didn’t charge an origination fee were the Perkins Loans for undergraduate and graduate students in financial need, but this program recently ended. While most student loans provided by private lenders such as credit unions and banks might not come with origination fees, they could cost you more in the long run by charging higher interest rates. Private student loans also don’t come with the federal protections that are standard with federal loans.

Keep in mind that loans with lower interest rates but higher fees can cost more than loans with a higher interest rate and no fees. An easy way to calculate whether your lender is giving you a good deal is to remember that 3% to 4% in fees is equivalent to a 1% higher interest rate.

Is my origination fee too high?

Origination fees are not required, so it’s at the lender’s discretion to waive or negotiate the fee, said Kris Alban, the San Diego-based executive vice president of iGrad.

“It’s always smart to ask for a discount, especially if you have a high credit score and it’s a large loan,” Alban said. “When negotiating, the lender may agree to lower or waive the origination fees if you’ll pay a higher interest rate — meaning they will still make a profit, and you can pay the fees over the length of the loan rather than up front.”

To get the best big picture outlook of whether you’re getting a good deal on your loan, make sure you’re not just comparing the origination fees but also factoring in the interest rate. For example:

  • A $10,000 loan at a 4.99% APR for five years with a 3% origination fee will cost you $11,620 over the life of the loan.
  • The same loan at 5.65% APR with a 1.5% origination fee will cost you $11,652 over the life of the loan.

“Pay attention to both the interest rate and APR,” Alban said. “If they are different, the lender is most likely factoring additional fees into the APR; any origination fee over 4% of the total loan amount is excessive.”

The bottom line

Origination fees are charged by lenders to cover the costs of processing your loan, whether you’re looking for a mortgage, personal loan or student loan. Even though lenders are subject to regulations, be cautious of anything that sounds too good to be true and remember that the absence of origination fees can translate into higher interest rates. “Take the time to read the fine print and completely understand the terms of the loan,” Luethje said.

While you should exercise your ability to price origination fees with different lenders to get you the best deal possible, remember there is no one-size-fits-all scenario. “Make the choice that best fits your needs. If an upfront origination fee hinders your ability to receive a loan but a higher interest rate is a better option, then that might be the best scenario for you as a consumer,” Luethje said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Barbara Balfour
Barbara Balfour |

Barbara Balfour is a writer at MagnifyMoney. You can email Barbara here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score