According to the latest data from FICO, the average FICO credit score in the United States is currently 716. This average has been trending upward since the beginning of the COVID 19 pandemic and continues to rise as the economy recovers from the pandemic. As many Americans made fewer purchases at the start of the pandemic, credit card usage declined and credit scores rose. Now that Americans are recovering from the financial impact of COVID, credit scores continue to rise.
To qualify for a personal loan, borrowers typically need a minimum credit score of 610 to 640; however, if you have a “good” or “excellent” credit score of 690, your chances of getting a low interest rate loan are much higher.
Key Statistics
National personal loan debt balances increased from $72 billion in 2015 to $210 billion in the third quarter of 2022.
The average personal loan interest rate in March 2023 was 10.71%.
22 million people in the U.S. had an unsecured personal loan in the third quarter of 2022.
Personal loans represent only 1.3% of overall consumer debt.
The average debt per personal loan borrower is $11,131.
The personal loan delinquency rate is more than twice as high as the delinquency rate for auto loans and mortgages.
What is a personal loan?
A personal loan is an unsecured sum of money you borrow from a bank, credit union or online lender.
After receiving the loan funds, you will begin making monthly payments on the loan and interest over a set repayment period. Personal loans can be used for any purpose, but are most often 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 pay one monthly fee at one consistent interest rate, rather than dealing with multiple lenders at once.
Debt consolidation can help borrowers make monthly payments. In the long run, consolidating all your debts under one interest rate may save you money. Debt consolidation can also improve your credit score, especially if you consolidate your outstanding credit card debt. Consolidating your credit card debt with a personal loan can lower your credit utilization ratio, which can improve your overall credit.
While debt consolidation and credit card refinancing are the most common uses of a personal loan, other potential uses include home improvements, major purchases, medical expenses, wedding expenses, and more.
How does a personal loan affect my credit score?
Applying for any type of loan can have a slight direct negative impact on your credit score as you take on more debt. However, if you use a personal loan to consolidate debt or refinance, you may be able to significantly improve your credit score over time. In addition, making regular, on-time payments will help you improve your credit score over time.
Pros and Cons: Personal loans affect credit
Pros Cons
Builds repayment history: Making payments on time will build a good repayment history, which will improve your credit score. Taking on debt: Every time you take out a loan, you take on additional debt. While it may be a good idea to use a personal loan to consolidate your debt, check your financial habits and situation before taking on more debt.
Improve your credit portfolio: Having multiple types of credit can help improve your credit score. If you already have a line of credit or credit cards, an installment loan will improve your credit portfolio and may improve your credit score. Additional Fees: Personal loan lenders may charge a variety of fees. Specific fees and surcharges vary from lender to lender. Some examples include late fees, prepayment penalties and origination fees.
Reducing your credit utilization ratio: Your credit utilization ratio is a measure of your available revolving credit and how much of it you are 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 can improve your credit utilization score. Create a credit inquiry: When you apply for a loan, the lender must run a rigorous credit check on your credit report, which will initially have a negative impact on your credit score. This drop in score will only last a few months, and applying for multiple loans can hurt your credit. If you apply to more than one lender, complete them all within a week or two to minimize the damage to your credit.
Lower interest rates: Personal loans usually have lower interest rates than credit cards, especially if you already have good credit. This makes it easier to make payments on time and keep your credit score intact. High interest rates for bad credit: While personal loan rates are on average lower than credit cards, personal loans usually have high interest rate caps. Borrowers with poor credit may carry high interest rates, making repayment more difficult.
What kind of credit score do I need to get a personal loan?
Your credit score is important when it comes to qualifying for a personal loan and the interest rate you receive.
When lenders evaluate your loan application, they want to see that you have a history of paying off your debts. Because your credit score is the primary indicator of your debt and repayment history, it is a key factor in determining whether you qualify for a loan and how much interest you will pay.
The most commonly used credit scoring system is FICO, with scores ranging from 300 to 850. Your FICO credit score is determined based on your payment history, total outstanding debt, length of credit history, credit mix, and any new debt you have. I accept. Payment history is given the most weight in determining your credit score and the total amount of debt outstanding.
Generally, borrowers need a credit score of at least 610 to 640 to qualify for a personal loan. To qualify for the lender’s lowest interest rate, borrowers typically need a score of at least 690.
FICO Credit Scores and What They Mean for Personal Loans
Poor It is difficult to qualify for a personal loan with a poor credit score. If you do find an eligible lender, your interest rate will be high and your borrowing limit may be more restrictive.
Fair (580 – 669) Borrowers with good credit are more likely to get a lower interest rate, but may still only be able to qualify for a lower loan amount.
Good (670 -739) Borrowers with good credit may be able to get a lower interest rate from the lender and qualify for a higher loan amount.
Very Good (740 -799) Borrowers with good credit will qualify for the lender’s lowest interest rate and a higher loan amount.
Exceptional (800+) Borrowers with exceptional credit will qualify for the lender’s lowest interest rate and highest loan amount.
