Getting approved for a personal loan even on bad credit is about knowing how the process works
I hate when economists and the financial media talks about how great the economy is doing. They talk about historically low unemployment and rising wages like everyone is enjoying some kind of wealth boom.
I know that’s not the case for millions of Americans.
I get emails every week from people that have been locked out of the financial system. People that aren’t making as much as they need or don’t have the credit score to qualify for loans. It all works to keep them from enjoying the financial growth with the rest of the country.
But there is a way to get back into that system once bad credit has kicked you out. Knowing how the process works to get a personal loan can help you get approved for the money you need and at rates you can afford.
I’ll first use peer-to-peer loan data to reveal the credit score needed for personal loans and average loan rates. Then I’ll show you how to qualify for any loan even if you have bad credit.
What Credit Score Do I Need for a Personal Loan?
Ask any bank or credit union and they’ll say you need a credit score of at least 660 FICO to get approved for a loan. That’s the cutoff for prime lending and anything lower is usually denied for a traditional loan.
Personal loans are different though. Online lenders don’t have the same credit requirements as traditional banks. Since they’re online, costs are lower and regulation less strict so they can offer lower rates to more people.
Personal loans require no collateral like your home mortgage or car loan. The loan goes on your credit report just like any other debt but you don’t have to worry about losing your house if you fall behind on payments.
But the credit score you need to get approved for a personal loan is going to depend on the loan website you choose and the terms of the loan.
Websites like SoFi and Upstart generally require higher credit scores, from 640 FICO and higher, for loan approval.
Sites like PersonalLoans and BadCreditLoans specialize in bad credit borrowers to help people with credit scores as low as 540 FICO to get approved. These websites work with dozens of lenders to shop your loan around depending on your credit score.
Usually it’s going to be tough to get even a personal loan with a credit score under 540 FICO but I’ll share some tricks later to help you get approved.
Average Personal Loan Rates
Using data from a peer-to-peer loan site, I made a table of the average personal loan rate by credit score. Understand that your loan rate is mostly going to depend on four factors.
- Credit score is the biggest factor in your loan rate but there are ways to increase your score fast to get a lower rate.
- Lower loan amounts will offer lower rates, usually any loan under $10,000 will offer the lowest rates available.
- Shorter-term loans will offer lower rates with three-year loans coming at the best rates versus five-year loans and longer.
- Which personal loan website you choose is also important. Some sites have higher credit requirements but offer lower rates while others specialize in bad credit loans.
The table shows the average personal loan rate at four different credit score ranges and the monthly payment on an example loan. The loan is for $7,500 on a 60-month payment term. Loans on a shorter 36-month term would likely be at lower rates but higher payments.
You can see that even on poor credit, the interest rates on a small loan are still below what you would see on credit cards or other types of loans. This is why personal loans are so often used for debt consolidation, paying off those high interest loans.
Click to check your rate on a personal loan up to $35,000 – won’t affect your credit
Personal Loan Application Requirements
While most people can get approved for a personal loan, there are still some requirements. Most of these are general requirements like age and income but others are more specific to the type of loan for which you’re applying.
- You’ll usually need some kind of verifiable income, either through employment or government programs like disability or social security.
- A checking account to receive your loan proceeds and make monthly payments.
- Borrowers must be 18 years old and be either a citizen or legal resident.
Personal loan sites differ on the income requirement for loans. Generally you’ll need an income of at least $2,000 a month to qualify but there are some sites that will approve borrowers on just $1,000 a month income.
Credit score requirements can vary by loan type as well. On a site like PersonalLoans that shops your application around to different lenders, you’ll need about a 540 FICO for personal loans, a 600 credit score for peer-to-peer loans and a 660 FICO for a bank loan.
Personal Loan Application Process
Getting a personal loan, even on bad credit, is about knowing the application process and how to use it to get approved.
1) You’ll first need to check your credit report and score to get an idea of which lenders you might qualify.
If you haven’t checked your credit report in a year, you can get a free copy from Annualcreditreport.com – the only truly free credit report website. This isn’t going to show you a credit score but you can usually get it free through a credit card program.
Knowing your credit score is going to tell you whether you can apply to the personal loan sites that require a higher score or if you need to start on the bad credit websites. That’s more important than most people understand.
Pick the wrong personal loan site, one that requires a higher score, and you’ll run the risk of getting denied. Every time you get denied a loan, it goes on your credit report. Get too many of these and lenders will hesitate to approve any loan.
2) Check your rate on a personal loan and see how much you can afford.
There are lots of ways to borrow the money you need while staying within your budget. Checking your rate on a personal loan will show you different options for monthly payments. You can decrease the loan amount or increase the term of the loan to lower your payments.
One mistake many borrowers make is taking out a loan that they can just barely afford. Don’t borrow so much or on terms that make the monthly payment barely fit with your budget. Leaving no room in your budget almost guarantees you’ll fall behind if an emergency expense comes up. That’s going to ruin your credit score and make any other loans much more expensive.
3) Shop around for your loan. Checking your loan rate will pre-approve you for a loan but it’s important to shop around for the best rates.
Some websites like PersonalLoans shops your loan around for you, looking at different lenders in peer-to-peer, personal loans and traditional banks to see who is offering the lowest rates. If you don’t use a loan aggregator like this, I recommend applying on at least two or three personal loan sites to get different quotes.
Click to get multiple offers for your loan with PersonalLoans
4) Fill out the full application and get your money. After pre-approval, the actual application process for a personal loan takes less than three minutes. You’ll need to include your contact information, link up your bank account and your employer information.
Once you’re approved for the loan, money is usually deposited in your account within a day or two. Payments start a month after you receive the money and there’s never a penalty for making extra payments or repaying your loan early.
How to Get a Personal Loan with Bad Credit
Anyone can get a personal loan but bad credit borrowers will need to work the system carefully to make sure you’re getting a loan you can afford. Loan rates on really bad credit can get expensive so it’s always better to try increasing your credit score for a couple months before applying.
If you don’t have time to improve your credit score, play around with the loan terms to get approved faster and at lower rates. Consider borrowing less than what you need but enough that will get you through the next eight to 12 months. Shorter-term loans with less borrowed are easier to get and will offer lower rates.
Paying off this small loan quickly will increase your credit score and you’ll get approved for a much larger loan to carry you through a longer term.
Getting a personal loan isn’t just about getting the money you need. It can help you improve your credit score and get access to the financial system so many people are locked out of still. The average credit score needed for a personal loan depends on the lender or website you use but there are many that specialize in bad credit loans. Take a minute to understand the process and how to use it to your advantage.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.