What is the Minimum Credit Score Needed for a Personal Loan?

Not aware if your credit score is high enough for a personal loan? You're not alone. A 2023 survey revealed that nearly 31% of Americans are unaware of their credit scores. Additionally, about 49 million U.S. adults lack a conventional credit score, with 28 million having no mainstream credit file at all.​

Whether you're aiming to consolidate debt, cover a significant expense, or need quick cash, your credit score can be the deciding factor between approval and rejection. But what’s the magic number lenders want to see?​

In this article, we’ll break down the minimum credit score typically required for a personal loan, and explore options if your score is less than ideal. Let’s understand what a credit score means and why it matters. 

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What Is a Credit Score and Why Does It Matter for Personal Loans?

Credit scores typically range from 300 to 850. The most commonly used scoring models are FICO and VantageScore. A higher score indicates better credit health and increases your chances of loan approval with favorable terms. Conversely, a lower score may result in higher interest rates or loan denial.

The higher your score, the better your chances of getting approved for a personal loan with favorable terms. Lower scores often mean higher interest rates and stricter conditions. Take a look at the following chart to understand the FICO credit score ranges.

Factors Influencing Your Credit Score

Your credit score is calculated based on several factors:​

• Payment History (35%): Timely payments boost your score, while late or missed payments can significantly lower it.​
• Amounts Owed (30%): This refers to your credit utilization ratio—the amount of credit you're using compared to your total available credit. Lower utilization is better.​
• Length of Credit History (15%): A longer credit history can positively impact your score.​
• Credit Mix (10%): Having a variety of credit types, such as credit cards and installment loans, can be beneficial.​
• New Credit (10%): Opening several new credit accounts in a short period can lower your score.​

These percentages are based on the FICO scoring model, which lenders widely use. By understanding and managing these factors, you can improve your credit score, increasing your chances of securing a personal loan with favorable terms. Let’s look at what credit score you need for a personal loan.  

Suggested Read: Will Paying Collections Help Your Credit Score: A Full Guide

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What Is the Minimum Credit Score Needed for a Personal Loan?

​The minimum credit score required for a personal loan varies by lender and loan type, but generally, a score of 580 is considered the minimum threshold for traditional lenders. However, a higher score can significantly improve your chances of approval and secure more favorable loan terms.

Typical Credit Score Requirements for Personal Loans

Note: APR (Annual Percentage Rate) estimates are indicative and can vary based on other factors such as income, debt-to-income ratio, and lender policies.

If you have bad credit, what are the chances of getting approved for a personal loan? Let’s understand.

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Can You Get a Personal Loan with Bad Credit?

Absolutely. While a low credit score may limit your options, several lenders specialize in offering personal loans to individuals with bad credit. These loans can be either unsecured or secured, depending on the lender's requirements and your financial situation.​ 

While you weigh your options, having a poor credit score is not unusual, and there are options available. ​As of the third quarter of 2024, approximately 13.2% of U.S. consumers had a poor credit score, defined as a FICO® Score between 300 and 579. Additionally, 15.5% had a fair credit score (580–669). Combined, this means about 28.7% of Americans have credit scores that are considered subprime or below average. Read some of the top strategies to apply for a personal loan with bad credit. 

Strategies to Secure a Personal Loan with Bad Credit

Even with bad credit, getting a personal loan is possible. By choosing the right lender, using a co-signer or collateral, and prequalifying wisely, you can boost your chances of approval and find better loan terms.

• Explore Specialized Lenders: Some financial institutions focus on providing loans to those with less-than-perfect credit. For instance, lenders like Upstart, Upgrade, and Best Egg cater to borrowers with credit scores below 640. ​
• Consider Secured Loans: Offering collateral, such as a vehicle or savings account, can increase your chances of approval and potentially secure better terms. However, be aware that defaulting on the loan could result in the loss of your collateral.​
• Apply with a Co-Signer: Having a co-signer with good credit can bolster your application, making lenders more inclined to approve your loan request. This approach can also help you qualify for lower interest rates.​
• Prequalify Without Impacting Your Credit: Many lenders offer prequalification processes that allow you to see potential loan offers without a hard credit inquiry. This step can help you assess your options without affecting your credit score.​

Struggling with debt that’s holding your credit score back? Shepherd Outsourcing Services can help you reduce or restructure your existing obligations, so you’re better positioned to qualify for a personal loan with terms you can actually afford.

The good thing is that your credit score is not the only thing determining your loan eligibility. Read the factors below that lenders consider beyond credit scores.

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Factors Lenders Consider Beyond Credit Scores

While your credit score is a crucial factor in loan approval, lenders also evaluate several other aspects of your financial profile to assess your ability to repay. Key considerations include:​

1. Income and Employment History

• Lenders require proof of stable income to ensure you can meet repayment obligations.
• A consistent employment history, typically spanning at least two years, is often preferred.
• Some lenders may accept alternative income sources, such as freelance work or government benefits, provided they are well-documented. 

2. Debt-to-Income (DTI) Ratio

• DTI is a measure of your monthly debt payments relative to your gross monthly income.
• A lower DTI indicates a better balance between debt and income.
• Many lenders prefer a DTI ratio below 36%, though some may accept higher ratios depending on other factors.

3. Loan Purpose

• Lenders may inquire about the intended use of the loan to assess risk.
• For certain purposes, like debt consolidation or home improvement, it may be viewed more favorably.
• Clearly articulating a responsible and feasible loan purpose can enhance your application's strength. ​

4. Collateral (for Secured Loans)

• Offering collateral, such as property or a vehicle, can reduce lender risk.
• Secured loans often come with lower interest rates compared to unsecured loans.
• However, failure to repay a secured loan can result in the loss of the pledged asset. ​

Shepherd Outsourcing Services’ personalized debt management plans can help you improve these factors before applying for a loan. If you’re curious about improving your credit score before applying for a loan, read the steps below. 

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How to Improve Your Credit Score Before Applying

​Improving your credit score is crucial for increasing your chances of qualifying for a personal loan with favorable terms. Here are some effective strategies, supported by research, to help you boost your credit score:​

1. Pay Bills on Time

Your payment history is a significant factor in your credit score. Consistently paying your bills, including credit cards, loans, and utilities, on time demonstrates financial responsibility and positively impacts your credit score. Setting up automatic payments or reminders can help ensure timely payments. 

2. Reduce Your Credit Utilization Ratio

Credit utilization refers to the percentage of your available credit that you're currently using. It's recommended to keep this ratio below 30%. For example, if your credit limit is ₹1,00,000, try to maintain a balance below ₹30,000. Paying down existing debts and avoiding maxing out your credit cards can help lower your utilization ratio. 

3. Limit New Credit Inquiries

Each time you apply for credit, a hard inquiry is made on your credit report, which can temporarily lower your score. Multiple inquiries in a short period may signal financial distress to lenders. It's advisable to apply for new credit only when necessary and to research eligibility criteria beforehand. ​

4. Use Credit-Building Tools

If you're new to credit or looking to rebuild your credit history, consider using tools like secured credit cards or credit-builder loans. Secured credit cards require a deposit and can help establish a positive payment history when used responsibly. Similarly, credit-builder loans are designed to help individuals build credit by making regular payments. 

If you have an urgent need for a loan and do not have time to improve your credit score, consider alternatives to personal loans. 

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Alternatives to Personal Loans

If a personal loan isn’t the right fit for your current situation, other financial tools may better suit your needs. Consider these alternatives:

• Balance Transfer Credit Cards: Many cards offer 0% introductory APR for a set period (typically 12–21 months), allowing you to pay off high-interest debt interest-free. Just be sure to pay off the balance before the intro period ends.
• Peer-to-Peer (P2P) Lending Platforms: Services like LendingClub or Prosper connect borrowers directly with investors. These platforms may offer more flexible approval criteria than traditional banks.
• Debt Settlement or Credit Counseling: Working with a trusted partner like Shepherd Outsourcing Services can help you negotiate or reduce your existing debt and create a clear path toward financial stability, often a smarter step before taking on new loans.

Read how Shepherd Outsourcing Services can help you. 

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How Shepherd Outsourcing Services Helps You Qualify for Better Financial Solutions

Shepherd Outsourcing Services can help you with debt settlement, reduce total owed amounts, and improve financial health. Whether negotiating with creditors or creating a long-term debt management plan, our experts guide you through every step, reducing financial stress and improving your loan eligibility.

Understanding your credit score is the first step toward securing a personal loan. Whether your score is excellent or needs work, there are options available. And if you need help improving your financial situation, contact Shepherd Outsourcing Services to find professional help for financial freedom.

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FAQs

1. What’s the lowest credit score that can still get a personal loan?

A: Some lenders approve scores as low as 580, but terms are less favorable.

2. Does applying for a personal loan hurt your credit score

A: A hard inquiry can temporarily lower your score by a few points.

3. Can I get a personal loan with no credit history?

A: Yes, but you may need a co-signer or secured loan option.

4. How long does it take to improve your credit score?

A: Consistent improvement can be seen within 3 to 6 months.

5. Are there government programs for personal loans?

A: Government programs are limited, but nonprofits may offer emergency loans.

6. How does debt settlement affect my credit score?

A: It may lower your score initially, but it prevents long-term credit damage.

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