Personal Loans

A Guide to LendingTree Credit Scores

Whether it’s to consolidate debt, cover medical bills or bridge a financial gap, people take out personal loans for many reasons. This type of unsecured installment loan can be taken out with a brick-and-mortar bank, credit union or online lender, and is repaid with a fixed interest rate over a set number of months, typically 12 to 60 months.

You’ll need to meet specific requirements to get a personal loan, including a minimum credit score. While each lender is different, most will only consider loans for those with a credit score of at least 585, and those with lower credit scores can expect higher interest rates from lenders, if they qualify at all.

What is a good credit score, and why does it matter?

There are various kinds of credit scores, but the FICO credit scoring model is the most commonly used by lenders. It uses the following ranges:

  • Exceptional: 800 to 850
  • Very good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Very poor: 300 to 579

The best credit score is 850. The majority (67%) of Americans have a good credit score or better, according to Experian, a major credit bureau.

Your credit score will affect your ability to do such things as qualify for a personal loan, get a mortgage and increase your card credit limits. That’s because lenders perceive those with higher credit scores as less risky, while people with low credit scores may be seen as risky borrowers, leading to higher interest rates or to be denied a loan.

That said, your credit score will affect the personal loan APR and loan amount you qualify for. The below chart reveals the average APRs and loan amounts offered to LendingTree users in Q4 2019.

How your credit score is calculated

Your credit score is calculated by the three major credit bureaus: Equifax, Experian and TransUnion. While scores differ slightly from one bureau to the next, your FICO score is calculated using the following factors:

  • Payment history (35%): Includes your record of on-time payments, missed payments, the number of days an account has been overdue, as well as how recently you missed any payments or delivered late payments.
  • Current debts (30%): Looks at how much you owe, the number of accounts you are responsible for and how much credit you have available compared to your current debt levels.
  • Credit history length (15%): Measures the length of time of on-time payments on every account.
  • Mix of credit accounts (10%): Considers the type of accounts you’re tied to, such as credit cards, loans, mortgages, etc. Showing an ability to juggle different types of accounts is good for your credit.
  • New credit activity (10%): Calculated using your recent activity, including recent payments you’ve made, hard credit checks and loan applications you’ve opened.

Other factors that affect your eligibility for a personal loan

While your credit score plays a significant role in determining whether you will qualify for a personal loan, lenders also will take into account other factors, including:

Your DTI ratio measures how much of your income goes toward paying debts each month. Lenders calculate this ratio by adding up your monthly debt payments and dividing it by your gross monthly income. In general, financial institutions prefer to lend to applicants with a lower DTI ratio, as it can signal to lenders whether you’d be able to manage your new debt.

Debts such as student loan payments, auto loans, mortgages and child support payments are included in your DTI ratio. Lenders prefer to see a ratio of 43% or less for mortgages and 36% or less for other types of loans, including personal loans.

Before you apply: Consider boosting your credit score

If you’re worried that your credit score isn’t good enough to qualify for a personal loan with competitive terms (or at all), you might want to take some time before applying. Taking the following steps can help improve your score:

  • Make payments on time, every time: You can’t change the past, but going forward, work to make regular, on-time and in-full payments for any debts or bills you may have. This will show lenders you can manage debt responsibly.
  • Pay down existing debt: Put simply, the less debt you have, the higher your credit score can be. Lenders want to know that you can repay your debts and also have the cash flow to manage monthly payments on a new debt.
  • Avoid applying for new credit: If you open several lines of credit in quick succession, your credit will be dinged with multiple hard credit inquiries, which lowers your score. New credit accounts may also lower your credit history length, hurting your score.
  • Ask for goodwill adjustments: If you’ve made late payments in the past, you can write to a creditor and request that records of those late payment be removed from your report. (Learn about asking for a goodwill adjustment here.)
  • Dispute errors on your credit report: It’s unfortunately common for credit reports to reflect outdated or inaccurate information, including old debts that should have been removed. These errors can lower your credit score, negatively impacting your chances of qualifying for a personal loan.You can request a free copy of your credit report from each of the major credit bureaus every 12 months through AnnualCreditReport.com. Review your credit report closely and if you find any errors, report them.

How to get a personal loan in 5 steps

  1. Check your credit score
  2. Get prequalified and shop for your best rates
  3. Formally apply with a lender
  4. Receive loan funds

1. Check your credit score

Start this process by checking your credit score. As laid out above, lenders will base much of your eligibility for a loan based on this number, as well as your income and DTI ratio.

You can view your FICO score for free through various means, and may be able to do so through the financial institutions you already work with. For example, some individuals with a Bank of America consumer credit card can see their credit score monthly and for free through their online banking or mobile apps. Chase offers similar services, including weekly score updates and credit alerts. Check with your financial institutions to see if they offer credit check services that can help you track your credit score and any changes that may occur.

If your score is below 585, you may want to hold off on applying for a loan, although you may still qualify for one but with high interest rates.

2. Get prequalified and shop for your best rates

Different lenders will offer you different interest rates, making it important to shop around for your best place to get a personal loan. Prequalification allows you to see the loan terms you may qualify for with a lender, if any. In most cases, the prequalification process only requires a soft credit check, which doesn’t affect your credit. You’ll also provide basic personal and financial information, such as your income amount and credit score.

Compare the following terms when shopping lenders:

  • APR: This figure represents your cost of borrowing and takes your interest rate and applicable fees into account, such as your origination fee. Some lenders don’t charge fees.
  • Borrowing limit: Depending on the lender, you may be able to borrow as little as $1,000. But some lenders require you to borrowing a minimum of $5,000. On the flip side, you’ll find lenders that have low or very high maximum borrowing limits.
  • Term length: Different lenders offer different repayment terms. Find lenders that offer repayment terms that work for you.

If you prequalify with a lender, keep in mind that the terms you’re quoted aren’t guaranteed. Once you’ve selected a lender you want to formally apply with, you’ll submit to a hard credit check, which lowers your credit temporarily but reveals more financial information about you.

3. Formally apply with a lender

After selecting a lender, you’ll submit a formal application. As mentioned above, you’ll submit to a hard credit check as part of this process.

Lenders often ask for the supporting documentation, as well. This can include:

  • Proof of income, including paystubs
  • Bank account statements to prove you have savings
  • Authorization for lenders to perform a hard credit check

 

Once you’ve been formally approved for a loan, you’ll be able to accept an offer and move on to the next step: obtaining your funds.

4. Receive loan funds

Some lenders make loan decisions quickly, and fund approved loans just as fast. This means you could get a personal loan the same day you apply. But more often, you’ll find lenders need at least a couple business days to not only approve your loan but release the funds.

In most cases, your lender will request banking information so they can directly transfer funds to your account. You may also have the option of requesting a check by mail or, if you’re consolidating debt, have your creditors paid off directly.

3 alternative options to a personal loan

If you’re dissatisfied with the personal loan prequalification offers you receive, there are alternative loan options you may consider.

Secured personal loan: These are personal loans backed by collateral, or property such as a vehicle that a lender can seize if you are unable to pay back a loan. These loans typically offer lower interest rates and higher loan amounts than unsecured loans, as lenders have an assurance they will be able to recover some or all of the value of the loan.

Home equity loan: If you own a home, you may be able to borrow against the value of your home at a low interest rate. You then agree to repay that sum over a fixed period. A word of caution: If you take out a home equity loan, your debt will be tied to your home. If you default on the loan, you risk losing your home.

401(k) loan: You can borrow against your 401(k) or other retirement account, which usually comes with minimal costs. However, you may face tax penalties if you do not pay back the loan on time. Also, carefully consider whether the money you borrow is worth the lost potential earnings.

 

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