A job loss or costly emergency can wreak havoc on your bank account and even impact your credit score if you get behind on your bills. If you have a less-than-perfect credit history, that doesn’t mean you have to rule out getting a personal loan.
Most lenders assess borrowers based on their FICO credit score, the industry standard. The ranges fall into these five categories:
- Poor: Below 580
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Exceptional: 800 and above
Lenders consider customers with scores above 670 to be creditworthy, according to FICO. If you have fair credit, you may not meet every lender’s eligibility requirements for personal loans, but some institutions will work with you. While the process can be more challenging, you increase your chances for success if you know what to expect and where to look.
How to apply for a personal loan
When you apply for a personal loan, the lender will check your credit history to measure how long you’ve had credit, how much credit you already have, how much of your available credit is being used and your track record for paying your bills on time. And a small group of lenders use a new type of credit score called Ultra FICO, which factors in your history of cash transactions.
If you fall into the fair credit range, you may still be approved, but you will likely be charged a higher interest rate. While some borrowers can qualify for personal loans with annual percentage rates as low as 4.99 percent, the average interest rate for personal loans is 10.32 percent, according to the Federal Reserve. If you have fair credit, your rate will likely be on the higher side. You may also be charged higher origination fees.
Before you apply for a personal loan, ask if the lender will prequalify you. This process involves a soft credit check, which doesn’t impact your credit score. You don’t want to inadvertently take an action that lowers your score further only to find out that you don’t meet the lender’s requirements.
Personal loan lenders for consumers with fair credit
Even though you will likely pay more for a loan when you have fair credit, you should still shop around for the best deal.
Check a variety of lender types, such as online lenders and local banks and credit unions. Federal credit unions, for example, cap interest rates at 18 percent. Compare the terms of the loan; while you may get a better rate from one lender, another may offer lower fees.
Here are a few of your options (as of February 2020):
Lender Minimum Credit Score APR Range
Avant 580 9.95 percent to 35.99 percent
Lending Club 600 6.95 percent to 35.89 percent
Prosper 640 6.95 percent to 35.99 percent
Upgrade 620 6.98 percent to 35.89 percent
Upstart 620 6.53 percent to 35.99 percent
Note: Interest and credit score requirements can fluctuate, so check the lender’s website for the latest information.
What to do if your loan application is denied
If a lender rejects your personal loan application, keep looking. There may be other options available. Carefully consider how the payment fits into your budget and don’t choose a lender with difficult terms. If you struggle to make the monthly payment, it could negatively impact your credit history going forward.
Take steps to repair your credit. Check your report for incorrect information, and dispute any discrepancies you find. According to the Federal Trade Commission, one in five people has an error on their credit report.
Pay down debt. Lenders like to see a debt utilization ratio—which is the percent of available credit that you are currently using—to be under 30 percent. And be diligent about paying your bills on time.
By taking some steps to improve your credit, you can set yourself up for better interest rates in the future and one day join the 800 credit score crowd.