You see the ads everywhere: “Apply Now” “Eligibility Guaranteed” “Fast Approval.” But no one every tells you the magic number needed to actually secure a loan, especially if you have little or no collateral.
A personal loan provides you with a lump sum of money to use for large purchases, emergency expenses, or to consolidate debt. These loans are typically unsecured, which means they require no collateral. With an unsecured loan, lenders will lean heavily on your credit to rate your approval.
So, what credit score do you need to apply for a loan? Continue on to find out more about how your credit score can affect your loan application.
What Credit Score Do You Need?
Different lenders have different risk tolerances, so many of them may not disclose the actual credit score required until after the preapproval process. It’s also common for lenders to consider your credit history and utilization in addition to your score.
You can typically get approved for a loan with a credit score between 600 to 700. If you checked your credit score and it doesn’t fall into the above range, you can apply for a secured loan using collateral.
Why is a Credit Score Important for Applying for a Loan?
When you need a loan, your credit score determines if and how much you are qualified for. It can also help establish what your interest rate will be. Lenders will look at your credit report for more than just your score. They’ll peak at your credit history to understand what type of borrower you are. If you make on-time payments and maintain a low credit utilization, you’re most likely to get approved.
What Affects Your Credit Score?
Knowing how to build credit will require you to understand what affects your credit score. There are a few factors that can affect your credit score both positively and negatively, including the following:
Credit Utilization:
Your credit utilization is how much credit you’ve used compared to your total amount of available credit. It’s wise to keep your utilization at around 30%, if not lower. If your credit utilization is often higher, you can be seen as a risk to potential lenders and may not qualify for the loan you apply for.
Payment history:
Lenders will view your credit history to determine what kind of borrower you are. Consistent on-time payments reflect that you’re good at paying your bills on time and will pay the lender what you owe.
Credit mix:
A credit mix consists of different types of credit, including credit cards and installment loans like personal loans, home loans, and car loans. Lenders will want to see that you have a good mix of credit and that it’s all in good standing. If you have several different loans and credit cards that are all past due, it won’t look good for your application for a new loan.
The Bottom Line
Although your credit score is important to lenders when you apply for a loan, other factors can help determine if you’re qualified. Many lenders don’t have strict guidelines on your exact credit score for approval. Your credit utilization, payment history, and credit mix are important factors to help prove your creditworthiness as a potential borrower.
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