It can be difficult to maintain a high credit score when you’re struggling trying to pay the bills. You made bad decisions such as relying on credit cards and not paying or are late on student loan and car payments. In fact, 12 percent of the population has a FICO score below 550, giving them bad credit.
Despite having low scores, there are times when you need a personal loan. Emergencies come up and it might be the only way to fix it.
What’s the lowest credit score for personal loan approval? That’s a complicated question and it depends on many factors.
What Is a FICO Credit Score?
Banks take on an element of risk whenever they provide a loan. There’s always a chance that person won’t pay it back. This leaves the bank to go through a costly and time-consuming collection process.
Banks needed a way to assess the risk of a person. Credit scores have been around since the 1800s. There wasn’t a scientific and accepted method until Fair, Isaac, and Company created the FICO score in 1956.
It used a scientific algorithm to determine the creditworthiness of a person based on several factors including their previous credit history. The score ranges from 300-850 with 300-579 considered bad credit, 580-669 considered fair, 670-739 considered good, 749-799 considered very good and 800-850 considered exceptional.
The higher the credit score, the less risk associated with that person. High credit scores provide opportunities for lower interest rates. Lower scores could mean loan denial.
What’s the Lowest Credit Score for Personal Loan Approval?
Do you want to get a standard personal loan from a bank to cover your next vacation? You’ll have a difficult time getting loans with a credit score of less than 580. This is because you’ve made mistakes in the past, and you’re considered high risk.
Once you enter the fair credit range, you’re more likely to get the loan. You may have to jump through hoops and provide some type of collateral though.
Collateral is an item such as a car or a home that you can put up in case your default on the loan.
If you own your car and use it as collateral, then the bank can take the car as payment if you default. The bank doesn’t want your car, but it helps reduce the risk.
You can also increase your chances by adding a co-signer. They’re adding their credit clout to you and promising that should you default on the loan, they’ll pay for it.
It’s not uncommon for family members to co-sign on a loan for their child. Especially if the child has a low score or not enough of a credit history to have a score.
High-Interest Loan for Bad Credit
While most banks have set limits on what they can do for loans, other lenders have more flexibility. They provide a small loan such as fast cash loans to help with the emergency. You’ll need to pay it back quickly and at a higher interest rate.
For example, if your car breaks down and you need $500 to fix it, but don’t have it. An alternative lender can provide you with the cash, but they’ll want the money back with interest within a few months.
The higher the amount you need, the higher your credit score. Do you want a $10,000 loan to pay for a vacation? Even a fair credit score may make it difficult for approval without collateral.
Lenders Can Be Flexible
The scores listed here are general, but every lender is different. One bank may have higher qualifications for personal loans, while others take on more risk. There are online tools available that provide a list of lenders that may take your application.
There are several factors that go into a lending decision including your FICO score, existing debt load, payment history, defaults, and civil judgments. You can have a low score because of past mistakes, but if you currently have a low debt load and good payment history, then your chances of approval increase.
Be Careful of Taking on Debt
Personal loans are often needed for emergencies. If they’re not paid back, then you could end up creating more problems. The loan you got is now a part of your credit record. The bank expects you to make the payments on time and pay back the loan as agreed.
If you don’t, then they’ll report the delinquency to the credit bureau and lower your credit score further. The loan solved one problem. If you default, then it creates another.
A few late payments won’t tank your credit score. If you have several missed payments or default on the loan, then it has a greater impact.
If you end up going to court and the lender gets a civil judgment against you, then you face increased fees due to court proceedings, wage garnishment, and a lower credit score.
Improve Your Credit Score for Personal Loan Approval
If you’ve tried everything and still can’t get a loan or are unwilling to pay the higher interest rates, then you need to improve your credit score. The first step is to get a copy of your credit report from Experian, Equifax, and TransUnion, the three major credit bureaus.
Make sure everything is correct on the reports and begin eliminating your debt. Pay off credit cards, pay utilities on time, and don’t take on any new debt. Work with creditors on payment arrangements and don’t miss payments.
It takes time, but your credit score will improve.
Bad Credit Doesn’t Mean No Credit
Even if you have a low credit score, there are options available to you for personal loans. The lowest credit score for personal loan approval depends on your situation.
You may pay more or need help, but the loan can be yours. It’s important to not take on too much and to adhere to the payment guidelines.
Your next loan may have better interest and easier to get because you paid the personal loan on time. For more information about how to spend the personal loan money, explore our website.