Do you need cash to pay for an unexpected expense, a large purchase, or to consolidate debt? Personal loans can be a great option in these situations, because they come with lower interest rates than credit cards, longer terms, and fixed payments.
If your credit isn’t perfect, you may think you can’t qualify for a personal loan. But there’s still hope! Getting a personal loan with fair credit may be a bit more challenging, but it’s certainly possible.
What is fair credit?
Before you start submitting applications, you should get a clear sense of your credit situation. If you haven’t done so yet, pull your free credit score. This will tell you where you fall on the credit spectrum.
Credit is considered “fair” when it falls in the low to mid-600’s, with FICO® scores ranging from 300 to a high of 850. According to the latest FICO® Score Distribution reports, 10-13% of the U.S. population have fair credit.
How does fair credit affect your chances of getting a personal loan?
If you’ve been approved for a car loan or a mortgage with fair credit, you might think that getting a personal loan will be a snap. Unfortunately, it’s not quite that simple.
Personal loans are unsecured, which means that a lender doesn’t attach collateral to your loan. If you don’t make your mortgage or car payment, the lender can simply repossess those assets. Personal loans rely on trust, and as such, are riskier for a lender. Lenders base their loan decisions almost entirely on your credit report and score.
Your credit score is a reflection of your financial reputation. FICO® Scores are an accumulation of several important financial factors, taken from your credit report and weighted depending on their importance.
For example, your payment history has the most weight (35%), so paying bills on time is essential to a good credit score. Other FICO® Score factors include your debt utilization, length of credit history, types of credit accounts, and recent credit score inquiries.
Should you improve your credit before applying for a loan?
If you find out that your credit lies in the gray area between fair and bad, you might want to improve your rating before you apply for loans. While there are personal loans for bad credit, they will cost you.
A Syracuse University study reported that borrowers with bad credit pay almost $5,000 more in credit card interest than someone with good credit. If you can move your score up into the fair range, you could save thousands on your personal loan.
One of the easiest ways to boost your credit score is to pay off some debt. If possible, try to pay down your balances so that you are using 30% or less of your available credit. You should also pay off any other outstanding personal loans and dispute any incorrect information on your credit report.
Where can you get a personal loan with fair credit?
There’s no shortage of personal loan lenders in the marketplace today. Look for lenders with a good reputation and affordable rates.
SuperMoney provides free expert reviews and consumer comments on leading lenders so you can check the terms and feedback of other borrowers before you choose a lender.
If you have an established relationship with a local credit union, you might want to start there. Provided they’ll accept your credit score, a credit union will probably offer you the best terms.
Online lenders are another excellent source of personal loans, particularly if you have less than perfect credit. Many of these lenders work with challenged borrowers and will also consider such things as income level when approving a loan.
Even with fair credit, there are several online lenders who might be happy to have you as a new customer. These personal loans will have higher interest rates, but they are much lower than payday loans and won’t roll over or trap you in an endless cycle of debt.
There are several benefits of dealing with an online lender. You can fill out your application at home and you’ll generally get an answer within the same day. If you are approved, many of these lenders will deposit funds in your bank account within just a few days.
Pick at least two online lenders that accept borrowers within your credit tier.
Some online lenders allow borrowers to add cosigners to their loan applications. Adding a cosigner who has excellent credit to your application may help you qualify for lower interest rates and better terms. Unfortunately, not that many lenders accept cosigners. Here are a few that do.
One of the top personal loan lenders for fair credit is Avant. You can also apply for a personal loan with LendingClub. This online lender offers personal loans up to $40,000 for people who have a credit score of at least 600. APRs range from 5.99% to 35.89%, and LendingClub will do a soft credit pull to determine your rate.
LendingClub has loan terms up to 60 months, and no prepayment penalties. They do charge a loan origination fee, which starts at 1%. Other borrower qualifications for personal loans include:
- At least a 3-year credit history.
- The debt-to-income ratio of 40% or below.
- No more than 5 hard credit inquiries in the past 5 months.
- Have two or more open and active credit accounts.
- Have verifiable employment and income.
LendingClub is the world’s largest lending marketplace for personal loans but is not available in either West Virginia or Iowa. Loans are usually funded in less than a week.
Prosper is an online marketplace lender that provides personal loans to borrowers with a credit score of at least 640. Their loan amounts range from $2,000 to $35,000. If your score is slightly lower, you might still be able to apply and qualify for a smaller personal loan.
When you apply with Prosper, you create a loan “listing” that appears on their marketplace. Peers, or investors, can choose to finance your loan when fully funded, the money transferred to your bank account.
You will find out your APR when you apply, which is based on your credit rating and Prosper’s score. To qualify for a personal loan with Prosper, you must:
- Own a bank account.
- Have steady and verifiable income.
- Have a social security number.
- Have a debt-to-income ratio of 50% or less.
- Show no bankruptcies in the past year.
- Not have more than seven credit inquiries in the past six months.
Prosper charges a loan origination fee that starts at 1% but has no prepayment penalties. You can find out your personal loan rate with a soft credit pull. Also, successfully paying off a Prosper loan can lower your rates on future loans.
In your search for a personal loan for fair credit, you might run across some alternative loan offers that sound easy to secure. Unfortunately, these offers are often too good to be true. If a company promises that they won’t pull your credit report for a loan, there is usually a catch. Payday loans don’t require credit scores, but their APRs can reach 300% or more. Car title loans also have notoriously high interest rates.
As long as you do your research, read user reviews, and avoid these pitfalls, you should be able to find a personal loan that works for you.
Making the right choice
When you shop lenders, compare interest rates as well as additional fees, so that you are sure you’re getting the best deal. Also, read online reviews of the lenders and check their legitimacy with the Federal Trade Commission to avoid lending scams.
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