A major factor in this calculation is the credit utilization ratio, which looks at your current debt vs. your overall credit limit. The lower this ratio, the better.
Length of credit history: Older credit accounts tend to contribute to a good credit score, and active old accounts are even better.
New credit: Hard credit checks that pull up your credit history and new credit accounts can hurt your credit score. It implies that you need credit and may be in financial trouble.
Credit mix: Having a diverse credit portfolio, such as retail accounts, mortgage loans, credit cards, and short-term loans, can provide a small bump to your credit score.
Credit scores range between 300 and 850, with higher numbers being better. Most personal loans require a minimum credit score of about 600 to qualify. Some lenders may offer loans to people with bad credit scores, under 600, but these loans tend to have high interest rates to mitigate the risk of not having a minimum credit score.
Having a good credit history can make a huge difference in the quality of your personal loan, from the amount you can borrow to your repayment terms and interest rate.
Income
Lenders want to know that you can pay your personal loan back and will often have minimum income requirements. These vary dramatically from lender to lender. For instance, SoFi has a minimum income threshold of $45,000 per year, while Avant needs a household income of only $20,000.
Overall, loans that have a steep income threshold tend to have better interest rates because the lender doesn’t have to mitigate as much risk. Individuals with higher incomes are more likely to pay off their loans than those with lower incomes and don’t represent as much of a default threat.
Even when lenders don’t disclose their minimum income threshold, you will have to provide evidence of your income. Examples of proof of income include:
- Tax returns
- Pay stubs
- Monthly bank statements
Debt-to-Income Ratio
The DTI ratio is an indicator of how much of the applicant’s gross monthly income goes to paying off debt. People with higher DTIs may struggle to take on and pay off additional debt, making them a risky venture to lenders.
Ideally, lenders look for a DTI of 36% or less. However, some lenders are willing to offer personal loans to individuals with up to 50%, provided they have an excellent credit history and www.installmentloansgroup.com/installment-loans-nj provable income.
Collateral
Collateral is any valuable asset that lenders use to secure a loan against the threat of default. If you can’t make your repayments, the lender may seize your asset to clear the debt.
Most personal loans are unsecured, which means they don’t require collateral. Most lenders will use high interest rates to offset the risk of not having collateral for unsecured loans.
- Cash or investment accounts
- Real estate property
- Collectibles
The interest rate on secured personal loans is often much better than those of unsecured loans, but you face the risk of losing your assets if you can’t pay off your debt.
Common Uses for a Personal Loan
Personal loans offer a great deal of flexibility in terms of what you can do with the funds. While some lenders may offer personal loans for specific uses, most will let you use the proceeds however you want.
Paying Off High-Interest Credit Cards
Credit cards often come with extremely high APRs, which can make them difficult to pay off. Personal loan rates are often much lower, which means that you’ll be paying a much lower total sum while still paying off the same amount of debt.
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