The average FICO credit score in the U.S. is currently 716, according to recent data from FICO. This average has been trending upward since the start of the COVID-19 pandemic and has continued to rise as the economy recovers from the pandemic. With many Americans making fewer purchases at the start of the pandemic, credit card usage went down and credit scores went up. Now that Americans are recovering from the financial effects of COVID, credit scores continue to rise.
To qualify for a personal loan, borrowers generally need a minimum credit score of 610 to 640. However, your chances of getting a loan with a low interest rate are much higher if you have a “good” or “excellent” credit score of 690 and above.
Key statistics
- The national personal loan debt balance rose from $72 billion in 2015 to $222 billion in the fourth quarter of 2022.
- The average personal loan interest rate from March 2024 is 12.10%.
- 22.5 million people in the U.S. had unsecured personal loans in the fourth quarter of 2022.
- Personal loans only account for 1.3% of consumer debt overall.
- The average debt per personal loan borrower is $11,116.
- Personal loan delinquency rates are over twice as high as delinquency rates for auto loans and mortgages.
What credit score is needed for a personal loan?
When lenders evaluate your loan application, they want to see that you have a history of paying off your debt. Your credit score is a window into your debt and repayment history. So, it is a key factor in determining if you will qualify for a loan and how much interest you will have to pay.
The most commonly used credit score system is FICO, with scores ranging from 300 to 850. Your FICO credit score is determined based on your payment history, total outstanding debt, the length of your credit history, your credit mix and any new debt you’ve taken on. Payment history is weighed the most heavily in determining your credit score, along with your total outstanding debt.
Generally, borrowers need a credit score of at least 610 to 640 to even qualify for a personal loan. To qualify for a lender’s lowest interest rate, borrowers typically need a score of at least 690.
FICO credit score and what it means for personal loans
| Poor | It is difficult to qualify for personal loans with a poor credit score. If you do find a lender you qualify with, your interest rate will be high and you will likely have stricter borrowing limits. |
| Fair (580 – 669) | Borrowers with fair credit have a better chance of qualifying for lower interest rates, but may still only qualify for low loan amounts. |
| Good (670 -739) | Borrowers with good credit will likely receive a lender’s lower interest rates and qualify for higher loan amounts. |
| Very Good (740 -799) | Borrowers with very good credit will qualify for a lender’s lowest interest rates and even higher loan amounts. |
| Exceptional (800+) | Borrowers with exceptional credit will qualify for a lender’s lowest interest rates and highest loan amounts. |
What is a personal loan?
A personal loan is an unsecured sum of money that you borrow from a bank, credit union or online lender.
Once you receive the loan funds, you begin making monthly payments on the loan, plus interest, over a set repayment period. Personal loans can be used for any purpose but are most commonly used to consolidate debt and refinance credit cards.
Using a personal loan to consolidate debt allows you to combine multiple outstanding debts into one loan. This means you only have to pay one monthly fee with one consistent interest rate, as opposed to dealing with multiple lenders at one time.
Debt consolidation can help borrowers stay on top of their monthly payments. It may save you money in the long run by combining all of your debt under one interest rate. Debt consolidation can also improve your credit score, particularly when you consolidate outstanding credit card debt. Consolidating your credit card debt with a personal loan allows you to lower your credit utilization rate, which improves your credit overall.
While debt consolidation and credit card refinancing are the most common uses of a personal loan, other potential uses include home improvement, major purchases, medical bills, wedding expenses, etc.
How do personal loans affect credit score?
Taking out a loan of any kind will have a slight immediate negative impact on your credit score because you are taking on more debt. However, if you use a personal loan to consolidate debt or refinance, you will likely be able to improve your credit score significantly over time. In addition, making regular on-time payments on your loan will help you improve your credit score over time.
Pros and cons: Personal loans affect on credit
| Pros | Cons |
| Building a payment history: Making loan payments on time establishes a positive payment history that will improve your credit score. | Taking on debt: Every time you take out a loan, you take on additional debt. While using personal loans to consolidate debt can be a good idea, examine your financial habits and circumstances before taking on more debt. |
| Improving your credit mix: Having multiple types of credit helps improve your credit score. If you already have a line of credit or credit card, an installment loan will improve your credit mix and likely raise your credit score. | Additional fees: Personal loan lenders can charge a variety of fees. Specific fees and added charges vary by lender. Some examples include late fees, prepayment penalties and origination fees. |
| Reducing your credit utilization ratio: Your credit utilization ratio is the measure of your available revolving credit and how much of it you’re using. The higher this ratio is, the lower your credit score will be. Since a personal loan is an installment loan, using it to pay off or consolidate revolving debt could improve your credit utilization score. | Creating a credit inquiry: When you apply for a loan, the lender has to do a hard credit check on your credit report, which has an initial negative impact on your credit score. This dip in your score only lasts a few months, applying for multiple loans can hurt your credit. If you put in applications with multiple lenders, do it all within a week or two to minimize the damage to your credit. |
| Lower interest rates: Personal loans generally have lower interest rates than credit cards, especially if you already have good credit. This makes it easier to make monthly payments on time and keep your credit score intact. | High interest rates for bad credit: While personal loan interest rates are lower than credit cards on average, personal loans often have high rate caps. Borrowers with less than stellar credit may be saddled with a high interest rate, making it more difficult to make payments. |
Personal loans for bad credit
A personal loan’s minimum required credit score depends on the individual lender. Evaluate individual lender requirements before applying. If you struggle with your credit and are looking for a personal loan, look at bad credit personal loans. These loans tend to have more flexible requirements, and lenders weigh a borrower’s entire financial history with less focus on credit scores.
But beware. Lenders see a low credit score as a sign of risk. The lower your credit score is, the higher the interest rate on your loan is likely to be. The terms of your loan are likely to be less flexible than a borrower with a higher credit score.
Make sure that the loan terms you qualify for will work for you, and that you can comfortably pay back the loan. Borrowers should also look out for predatory lending by verifying a lender’s credentials before applying.
Credit considerations when getting a personal loan
Check your credit score and credit reports when applying for a personal loan. Knowing exactly where you stand will help you better determine what rates you will qualify for with any given lender.
Before you choose a lender, shop around for the best personal loan rates available. You should also read the fine print for individual lenders to ensure you know exactly what you are signing up for, including additional fees. Be sure to calculate how much your monthly payments will be before committing to a loan.
What age group takes out the biggest personal loans?
How to compare personal loans
There are many variables to consider when comparing personal loans. Factors you should look into include:
- APR: This is the interest rate you can expect to pay, usually a percentage of the loan principal.
- Secured vs. unsecured: Secured personal loans are often easier to qualify for, as they require collateral, which is an asset to secure the loan. Mortgages and auto loans are examples of secured debt, as the loan is secured by the home or vehicle. Unsecured debt may have a higher interest rate, but does not require collateral, which can be seized if you fail to make payments.
- Loan term: This is the time over which you can expect to make repayments. Common loan terms for personal loans are 2 to 5 years, but some may be as long as 7 years. Typically the shorter the loan term, the lower the APR.
- Fees: Most personal loans have associated fees, which are added onto your principal and increase the amount you owe. Be sure to read the fine print on your loan to understand how much you can expect to pay in origination, payment processing, late payment, and prepayment penalty fees.
- Joint loans: If you don’t have a very strong credit history, you may be able to sign with a co-borrower for a joint loan. This may increase your chances of being approved, but remember your co-borrower will be responsible for the loan too.
The bottom line
Before taking out a personal loan, make sure that you know what your credit score is in addition to having a clear understanding of your financial picture. Consider the interest rate you’re likely to qualify for, compare lender requirements and terms, and calculate how much your monthly payments will be.
To minimize damage to your credit score, apply with multiple lenders in the same two-week timespan. Go over the loan terms carefully before officially taking on the loan. For the best results, you should build up your credit before taking on more debt, or seek a type of credit-building product.
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