Personal loans come in handy when you have any kind of financial needs like a big wedding to plan, home consolidation, credit card bills to pay or any debt that needs paying off. The bases for getting personal loans are borrower’s credit history and his ability to repay them from his income. The main factor which decides whether you are eligible for a personal loan or not is, however, your credit score.
The lender does a thorough background check on your credit score. Make sure to keep your score as strong as possible to increase your chances of getting a personal loan. You can calculate your credit score and weigh your chances of getting a loan. Once you get to know how lenders approve your application, you already have an upper-hand.
Why The Credit Score Matters is Important for Personal Loans:
People who use credit cards and take out loans have credit scores. It is basically a number which defines how well you handle your money problems. This score is a three-digit number that also determines your level of trustworthiness. It is based on the analysis of a person’s credit history.
Personal loans are unsecured which means you don’t have to offer anything as collateral. So the credit score is the main thing which shows lender if you can be trusted with the loan repayment or not. There are three credit major reporting agencies: Experian, TransUnion, and Equifax. They collect the information on your report. The lenders report your repayment history to these agencies. Your data is saved to generate a report of your credit. You can also get a free credit check from these three bureaus each year before applying for a loan. This will help you determine your eligibility for the loan.
There are different methods of calculating a credit score. The most commonly used is FICO (short for Fair Isaac Corporation). This score can range from 300 to 850. A Higher score means more chances of getting higher loans and lower interest rates.
People with bad credit also get personal loans. But these loans are usually those with a small amount of loan and high rate of interest.
Ideal Credit Score to Get a Personal Loan:
One huge convenience of personal loans is that you don’t have to offer anything as collateral. Which means in case of a mishap when you can’t make your repayments on time, your house or other property would be safe from foreclosure. However, do not make it a habit as it will adversely affect your credit score and hence, your chances of getting loans in future.
Different credit scores have different rates of interest. For example, the average interest rate of a person with a score ranging from 720 to 850 is 10.3 to 12.5 percent. The rate for a person with poor score e.g. ranging between 300 and 639 can be from 28.5 to 32 percent.
Keep in mind that a difference of just 50 points in your credit score can have a huge impact on your interest rate. The credit union hasn’t decided a fixed minimum score for personal loans. Based on your interest rates, Lanco Federal Credit Union in Lancaster, Pa. offers the following rates:
- Customers with 750+ scores receive an 8.99% APR
- 700-749 credit scores receive a 9.99% APR
- 660-699 credit scores receive an 11.99% APR
- 620-659 credit scores receive a 15.99% APR
- If your credit score is under 620, your rate will be 17.99% APR
How Does Good Credit Help You Save on Personal Loans:
You can lower the money on your interest by raising your credit score. It also affects the affordability of your personal loans. According to a report by LendingTree:
- A borrower who has taken 48 months long loan of $10,000 can receive an APR of 21.9% if he has a poor credit score. He can expect to pay $15,096.96 over the course of the loan.
- The borrower who has taken the same loan and has good credit score can have an APR of 5.99%. he’ll pay $11,270.40 over the course of the same loan.
In this scenario, the borrower with good credit can save up to $3800 over the course of a four-year loan.
Review Your Credit Report:
Your credit report which has your credit history decides whether you qualify for the loan or not. You can review your credit report yourself and weigh your chances of getting the loan. The credit reporting agencies offer you a free credit check each year. Get reports from all three to determine your score better. Your card issuer might also give you free access to credit score.
Annie Sanchez is the founder of the website Debt Free Like Annie. This website is dedicated to helping people get out of debts. According to Annie, there are many things that could be bringing your credit score down unknowingly. Such as unfavorable information from someone who has the same name as you or being the victim of identity theft.
Also, look out for the information that might jeopardize your chances of getting a loan. According to Annie, ‘“If you have paid late, gone over 30 percent of your credit limit, closed your oldest credit cards, applied for too much credit at the same time, or stuck to only one source of credit, it’s possible that you could get denied or receive an unfavorable interest rate.”
How to Raise Your Credit Score:
One good thing about credit score is that they aren’t permanent. The numbers may fluctuate. You can build up a healthy score before applying for a loan. Now that you have information on the criteria lenders have set for the loans, you can qualify for loans by fixing the problems which are getting in the way of you getting a loan. Keep in mind to always focus on maintaining a FICO score of 100 points in one year. This will help you get a loan with a lower interest rate.
Choose a lender and check for the eligibility criteria to get a loan from that lender. You can also prequalify by filling out a loan application form. This form will tell you how much loan and at what rate you can get with your current credit score.
You can increase your credit score by keeping a low balance on credit cards and other ‘revolving cards’. Pay your debts off and ask for a credit-limited increase on current cards. You can raise your score by up to 30% by increasing your credit limit, which is the amount of debt you have divided by your current credit. However, don’t close the unused credit cards to boost up your score and don’t open new credit cards which you don’t need to have a short-term increase in score.
Correct errors on your credit report to boost up your score. You can pay off large debts aggressively to improve your score. You can also set up automatic payments to pay bills on time.