How to get a personal loan with fair credit
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When you apply for a personal loan, the lender will evaluate your financial health and credit profile to make a lending decision. Your credit score plays a vital role in whether you’re approved and, if so, what loan terms you’ll be offered. Credit scores range from 300 to 850, and the most favorable loan terms are reserved for borrowers with good or excellent credit.
A fair credit score — one between 580 and 669 — doesn’t necessarily mean you won’t get approved for funding. However, you can expect slightly higher interest rates, shorter loan terms, and in some cases, higher fees.
You can get a personal loan with fair credit
It’s possible to get a personal loan with fair credit. However, you generally won’t have the same amount of options as you would with a stronger credit score. You can also expect higher borrowing costs since lenders use credit scores to gauge the risk of default, and a fair credit score often indicates you’ve had some challenges in the past.
Personal loans are available through traditional banks, credit unions and online lenders. Most traditional banks prefer borrowers with solid credit scores, so they may not be your best choice.
If you’re a member of a credit union, you could get approved for a personal loan with a fair credit score based on the strength of your relationship with the financial entity. Credit unions also cap personal loan interest rates at 18 percent.
Online lenders tend to be the most lenient but sometimes charge higher interest rates and fees for the flexibility they provide. Peer-to-peer lenders are also an option, but, like banks, they come with stringent eligibility guidelines and higher borrowing costs.
How fair credit affects a personal loan
If you’re applying for a personal loan with fair credit, here’s what to expect:
- Higher interest rates. The average personal loan interest rate for borrowers with scores between 630 and 689 is between 17.8 percent and 19.99 percent. However, good credit borrowers pay between 13.5 percent and 15.5 percent in interest.
- Steeper fees. Origination fees aren’t uncommon with personal loans. Some lenders charge a flat rate, others assess the origination fee based on the borrower’s credit score.
- Shorter repayment periods. A fair credit score also means you may be offered a shorter loan term. This means you’ll save on interest and pay the loan off faster, but the downside is your monthly payment could be more than you can comfortably afford.
- Lower loan limits. The lender may be reluctant to lend you a large sum of money with a fair credit score.
How to decide if a fair credit loan is right for you
Ultimately, a personal loan makes financial sense if you truly need to borrow the funds and there’s a loan with reasonable terms available to you. Assuming you make timely monthly payments, the loan will also help improve your payment history and possibly boost your credit score.
That said, you should explore other funding options if the loan offers you’ve received come with exorbitant interest rates or repayment periods that make the loan payments unaffordable. It’s not worth stretching your budget thin to afford the monthly payments. Furthermore, you could do more harm than good if you default on the loan as you’ll likely damage your credit rating.
How to boost your credit before applying
It helps if you improve your credit score before applying for a personal loan. Doing so could open the door to loan options with more competitive terms and lower borrowing costs. Plus, you could save a bundle in interest, depending on how much you can boost your credit score.
To boost your score, there are three key steps you should take.
- Make timely payments. Payment history accounts for 35 percent of your FICO credit score. So, be sure to pay your bills on time and get current on any past-due accounts.
- Pay down debt balances. Your credit utilization rate, or the amount of revolving credit in use, makes up 30 percent of your FICO credit score. If possible, aim for a rate of 30 percent to give yourself the best chance at a strong credit score.
- Don’t close old accounts. Credit age is another important factor in the FICO equation. It accounts for 15 percent, and old credit accounts in good standing help this figure even if the cards are idle.
How to get a personal loan with fair credit
When you’re ready to apply for a personal loan, following these steps will help streamline the process.
- Assess your needs. Use a personal loan calculator to determine how much you can comfortably afford to borrow. Include the origination fees and other costs the lender may charge in your calculation.
- Check your credit. Knowing where you stand before applying is best to avoid surprises. If your credit score is on the lower end of the fair spectrum, consider bringing a co-signer on board to strengthen your approval odds and possibly qualify for more attractive loan terms.
- Get prequalified. Each formal application for credit results in a hard inquiry and can ding your credit score by a few points. But you can avoid hard pulls by getting prequalified online with the lenders you’re considering to gauge the likelihood of being approved and avoid unnecessary inquiries.
- Compare loan offers. Evaluate the prequalified offers you receive to determine which is most suitable. If the loan quotes don’t quite work for you, shop around with other lenders, including local banks and credit unions, as they may be able to offer you better terms.
- Apply for a loan. Be sure to complete the loan application in its entirety, check for errors and upload any required documents to avoid an inadvertent denial.
The bottom line
It’s possible to get a personal loan with fair credit. However, you likely won’t qualify for the same favorable loan terms as you would if you had good or excellent credit. So, it’s worth improving your credit score before applying. But if you’re crunched for time and need funding soon, be sure to evaluate lenders to find the best deal on a personal loan for fair credit or consider other more cost-efficient alternatives.