Personal loans are a common and popular way to access a lump sum of money quickly, but in order to be eligible for most personal loans, you will need to pass a credit and affordability check. If you have a below-average or poor credit score, you may still be able to get a personal loan if your DTI (debt-to-income) ratio is favorable. However, with a low credit score, spotty credit, or a high DTI ratio, you may find it harder to get the kind of loan or credit you want.
Good Vs Fair Credit – What’s the Difference?
Your personal credit score is a three-digit number that indicates to lenders if you are considered a reliable and safe person to lend money to. A high credit score indicates someone who pays their debts on time, does not go delinquent on debts, and is not or has not in the recent past declared bankruptcy.
In short, a good credit score shows that you are financially stable and responsible. Of course, life can be unpredictable. Even the most responsible people may run into financial issues at times, and these issues can lower their credit score.
Credit scores are calculated based on length of credit history, credit mix, amounts owed, payment history, and new credit. The credit score ranges are as follows:
- 800 – 850 (Exceptional)
- 740 – 799 (Very Good)
- 670 – 739 (Good)
- 580 – 699 (Fair)
- Under 580 (Poor)
More people fall into the categories of ‘Fair’ and ‘Good’ than any of the more extreme options. These categories include people who may have had minor issues, such as one or two missed payments or a high DTI ratio, but who are otherwise reliable and eligible for credit and loans. If you have a fair credit score rather than a good one, you are likely to find that the APR you are offered by lenders is higher and that you are ineligible for certain perks.
What Causes a Below Average Credit Score?
Even if you have not defaulted on any debts, your credit score could be negatively impacted by other events and issues. The most common causes of a below-average credit score are:
- Missed payments
- High DTI ratio
- Paying only the minimum amount each month
- Being subject to a small claims judgment or having property repossessed
- Declaring bankruptcy
- Numerous hard credit checks in a short period of time (e.g. six months)
The average credit score in the USA is between 699 and 703, but it is important to remember that the average is not necessarily the most common, as such figures are impacted by those at the highest and lowest end of the credit score scale.
It is fairly common to have a credit score in the mid-600s, and you can get a personal loan with a credit score of 650 and still have reasonable terms and interest rates. You simply need to know where to look.
How Can I Get a Personal Loan with a Low Credit Score?
First and foremost, you need to accept and prepare for the fact that getting a loan with a lower-than-average credit score will generally mean higher rates of interest and fewer perks and benefits. Take some time to assess your income and outgoing, and set a limit for what you can afford in terms of monthly repayments.
Successfully repaying a fair or bad credit loan will go a long way towards increasing your credit score, but if you miss payments, it will have a very negative impact. Here’s how you can get a bad or fair credit personal loan:
Consider Secured Loans or Co-Signed Loans
If your credit score is low or fair and you have a high DTI ratio, you may find it hard to get a loan with no collateral or co-signer. Loans with these options can open doors for you and will help to improve your credit score, so long as you pay back what you owe on time.
Shop Around
There are many different finance options available these days. Do not simply accept the first offer you get, as you could potentially find better rates by shopping around. Do some preliminary research and undertake a few soft checks before you commit to anything. This will help you secure the best loan for you.
Pay Down Existing Debts
A high debt-to-income ratio is one of the most common reasons that people are rejected for loans. If you are able to, pay down your existing debts as much as you can before you apply for a personal loan. This will not only improve your chances, but could contribute to your getting a better rate of interest.
If you follow these steps, you will have a much better chance of getting a personal loan and improving your credit score for the future.