Your credit score can define your creditworthiness according to most lenders, and will determine what options might be available to you.
Since a personal loan is a type of loan that is unsecured, meaning it does not require collateral, they can be used for practically anything. Thinking of renovating your home? Looking to finance your dream vacation? Maybe you would like to consolidate your debt and try to get into lower monthly payments. Or maybe you have an emergency car repair but don’t have the funds to take care of it, but need your vehicle to get around and to work.
Whatever the reason, having a good credit score will definitely help with being eligible for getting a personal loan with decent interest rates. While it’s possible to get approved for a personal loan with a lower credit score, there is a connection with what your score is and what interest rate might be offered by lenders.
Almost all lenders have different criteria about who they might lend to, but many many also define the scoring ranges differently too. One lender might state that a credit score of 690-719 makes for a good credit score rating, another might state 700-759, and other lenders might say a good credit score range is something else. According to Equifax , one of the big credit bureaus in Canada, a good credit score ranges from 660 – 724.
What is a Good Credit Score or Bad Credit Score?
A credit score in Canada can range from 300 (very poor) to 900 (exceptional) with many people landing around the 600’s or 700’s on average. The best interest rates are typically reserved for those with great to exceptional credit ratings, which are typically 800 or higher. When your credit score is 700 or greater, you usually have a fair amount of good options to choose from when it comes to personal loan lenders.
When your credit score falls under 600 you probably won’t have that many options for borrowing. This can also depend on the amount and term that you are looking to borrow as well. When you have a lower score, an installment loan can be another option to consider.
Why is a Good Credit Score Important for a Personal Loan?
The significance of your credit score when it comes to personal loans is that it represents your creditworthiness, and helps lenders determine what sort of risk you might be, and whether you are likely to pay back the loan and make your payments if they allowed you to borrow.
Lenders will consider an applicant with a lower credit score to be more risky, and possibly be more likely to fail in repaying their debts.
The basic factors behind a credit score include;
- Payment History – How well you have managed to make payments on time.
- Credit Utilization Ratio – How much credit available to you is being used.
- Payment History Length – the actual age of your history, the longer the better.
- Credit Mix – Whether you have a variety of credit accounts to be considered.
- New Credit – How much new credit accounts recently opened, and recent hard inquiries.
What Credit Score Do You Need to Get Approved
Unless you have a really bad credit score, it’s often possible to get a loan. But at what cost will depend on your score. Since every lender will look at applicants differently, there isn’t a hard rule for what sort of interest rate might be offered.
What is the minimum credit score required for a personal loan
A credit score of at least 600 will provide you some options for getting a personal loan, but your choices will probably be limited and the interest rates higher when applying with fair credit.
What Other Factors Affect Getting Approved
While your credit score is a big factor, there are a few others that can also influence whether your personal loan request might be approved.
The amount that you request is certainly going to be a big factor, along with the term. Lenders prefer to not take chances, so if you’re trying to borrow a large amount and have a bad credit score, that can be one cause for denial.
The term or duration of your loan can also work against you, and while it might lower your monthly payments, asking for a long term can be another cause for denial of your loan request.
When is a Credit Score Too Low for a Personal Loan
It’s usually when someone has a credit score near 550 or lower that it becomes much more difficult to find personal loan options that will consider your application. When this is the case, sometimes installment loans can be an alternative for borrowing.