You may think that if you have an average credit score, you’re ineligible to apply for a personal loan. While that statement was mostly true when big banks were the major players in the personal loan industry, the rise of alternatives and online lenders has changed the game.
Traditionally it’s been difficult for a person with an average credit score to secure a personal loan because money lenders consider them as high-risk borrowers. But, by bearing the brunt of possible higher interest rates and shorter loan terms, it may still be possible to get a personal loan with an average credit score.
What is a credit score?
A credit score is a numerical value given to a person based on the analysis conducted on their past borrowing activity. The purpose of this score is to show lenders how reliable a person has been in the past at repaying their loans.
Your credit score is rated on a five-point scale, ranging from ‘weak’ to ‘excellent’ and is given in numbers between 0 and 1,000 or 1,200. To determine this score, credit reporting agencies compile all your personal and financial information, including your previous loans, debts and the number of applications you’ve made to secure a loan. The highest rating score you can get depends on where you get your credit report from, for example, Experian can give you a score up to 1,000, while Equifax rates up to 1,200.
If your credit score is 600 or higher, you’re considered to be in the ‘good’ or ‘excellent’ category, on the other hand, anything lower than 500 comes in the ‘weak’ category.
Will an average credit score impact the interest rate of the loan?
Typically, lenders make use of risk-based pricing models to determine the interest rate that is applicable for a particular loan. Risk-based pricing refers to when a lender does not offer a set interest rate and instead provides an interest range for the loan. When you send your application, the lender will first assess your credit report, including your credit score, income and existing debts. Based on this information, the lender may decide to make a loan offer, with an interest rate that is within the initially proposed interest range.
So, applying for a personal loan for an average credit score will most likely impact the interest rate. However, it’s often difficult to determine how high the rate will be until you apply.
Having said that, you could still consider comparing your loan options by taking the interest range into consideration, along with other costs like application fees, ongoing fees and early repayment fees.
Which personal loans can you apply for with an average credit score?
When applying for a personal loan, it’s important to understand that the number of times your application is rejected has an impact on your credit score. To increase the chances of getting approval on your personal loan application, you could consider applying for certain personal loans that are more likely to get approved even with an average credit score.
For example, you could apply for an unsecured personal loan. An unsecured loan means that you can potentially get a loan without putting up any asset or security as collateral for the loan. While you could get approval for an unsecured personal loan with an average credit score, you will most likely have to pay higher interest rates as compared to a secure personal loan. Also, as there is no guarantor or asset, the lender can take legal action against you if you default on your payments.
Car loans could be a good option too, because even with an average credit score the value of the car secures the loan. So, if you consider taking a loan for an affordable model, the chances of your loan application getting approved are higher.
It’s important to look at your capacity to pay back any money you intend to borrow before taking out a loan. Some of these loans have high interest rates and it could be worth seeking advice before applying if you have an average credit score.