What Credit Score Do I Need for a Personal Loan?

A personal loan can be a useful financial tool, helping you pay for unexpected expenses, large purchases, and everything in between. In order to receive a personal loan, however, you’ll first need to qualify. 

Qualifying for a personal loan from a bank, credit union, or online lender will depend on a number of individual factors, one of which is your consumer credit score.  Here’s a look at how your credit history plays a role in the personal loan application process, and what your credit score needs to be in order to get approved.

Why Credit Matters

Your credit history is a record of your current and past financial accounts. The three credit bureaus (Experian, Equifax, and TransUnion) track these accounts as they’re reported by the individual creditors, building a report that shows:

• What sort of accounts you own (revolving accounts, installment loans, etc.)

• How much you owe

• How much you pay monthly on those accounts

• Whether you pay on-time

• How long you’ve had those accounts

• Whether you’ve applied for new lines of credit recently

From this data (which is kept for about seven years), potential lenders can see whether you manage your accounts responsibly. They can also gauge whether you’re likely to manage new accounts responsibly in the future, and pay your bills on time as promised. 

If you pay your bills on time and maintain reasonable levels of debt, you’re more likely to be deemed “creditworthy.” This can boost your chances of getting approved for a new personal loan when the time comes to apply. 

Who Might Consider a Personal Loan

Personal loans can be used for a variety of different purposes. 

• You can cover unexpected expenses that arise. If you find yourself facing a sudden medical emergency or a broken-down car, a personal loan can give you fast access to the cash you need, when you need it most.

• Pay for large purchases. Thinking about taking a big family vacation or need to pay for a wedding? A personal loan can cover those big, one-off expenses in life.

• Consolidate high-interest debt. If you are walking around with high-interest debt — such as credit card balances or student loans — a personal loan can help you consolidate and simplify your balances. You can often snag a lower interest rate in the process, helping you save even more money while you pay off the debt.

• Tackle pricey projects. Home improvement projects can easily cost tens of thousands of dollars, whether you’re replacing the A/C, installing a new roof, or renovating your entire kitchen. A personal loan is a great way to cover those costs with cash on-hand.

What You’ll Need to Qualify for a Personal Loan

Each lender will set its own requirements when it comes to qualifying for a personal loan. Though the specifics will vary, you can expect these requirements to include a blend of the following:

• A strong credit history: Your prior credit will factor into your approval (or denial). Lenders want to see that you make payments on time and manage your debt responsibly, before approving you for additional debt.

• Adequate Income: If you’re asking for a loan, you’ll need to show evidence that you can afford to pay it back each month. This means showing that you earn enough income to pay your current debts. You may be asked to provide bank statements, current and past pay stubs, or former tax returns.

• Proof of Employment: Many lenders will want to see that you are currently employed, so they can rest assured that you’ll be able to continue paying on your new loan until it’s satisfied.

• A moderate debt-to-income (DTI) ratio: It doesn’t matter how much money you make if your existing financial obligations account for most of that income. Lenders will calculate your DTI, or debt-to-income ratio, which shows how much of your monthly pay goes toward paying off other debts. Ideally, you’ll want to keep this below 30-35%. 

What Credit Score You’ll Need to Take Out a Personal Loan

So, what is the magic three-digit number that will get you approved for a personal loan? Well, as with most personal finance questions, the answer is it depends.

In general, the higher your credit score, the better. The most common scoring models (such as FICO and VantageScore) have a range of 300 to 850; many lenders will prefer a score of 640+ in order to approve your application.

Since credit score isn’t the only factor, though, your mileage may vary. If, for example, you have a great credit score but have a really high debt burden (and DTI ratio), or have opened a number of new accounts in the last few months, you could still find the process challenging. 

Even if you’re approved, having a healthy credit score can unlock better loan terms, such as lower interest rates. This can save you money over the course of your new personal loan. 

Bottom Line

No matter why you need a personal loan, getting approved — and for the best possible loan terms — will depend on factors like your credit score. Each lender will set its own requirements, so there’s no magic number. However, having a healthy score and managing your existing accounts responsibly can help you get approved for the funds you need most.