If you have a financial need but don’t have the funds available to cover it, a personal loan may be worth considering. A personal loan can help with things like consolidating higher-interest debts to save on interest, covering an unexpected expense, improving your home, repairing your car, or paying for post-secondary education, among other things.
The question is, what is needed to qualify for a personal loan? More specifically, what credit score do you need for a personal loan?
What Credit Score Is Needed For A Personal Loan?
To be eligible for a personal loan in Canada, especially with banks and other traditional financial institutions, you’ll usually need a minimum credit score of 660.
That said, the exact credit score required for a personal loan depends on other factors, like your income, debt, and collateral. Further, different lenders may have their own specific credit score requirements, but good credit can help you qualify for the most competitive rates and terms.
| What Is A Personal Loan? A personal loan allows you to borrow a lump sum of cash that you pay back in installments over a set term with interest. The terms will vary depending on the lender, your credit score, and your overall finances. |
Can You Get A Personal Loan With Bad Credit?
If you have a score under the 660 threshold, you may need to apply for a personal loan with an alternative lender — such as an online lender, private lender, or credit union — rather than a traditional financial institution.
Alternative lenders have more lax credit score requirements, though personal loans from these types of lenders will likely come with higher interest rates.
| Can you get a personal loan with a zero or no credit score? Yes, you can still get a personal loan even without a credit score. Alternative lenders are available who look at other factors in lieu of your credit score, such as your income, employment status, and collateral. |
Personal Loans: Good Credit Scores Vs Bad Credit Scores
Your credit score plays an essential role in determining both your loan interest rate and your odds of approval. Here is how good and bad credit may impact each factor:
| Good Credit Score | Bad Credit Score | |
| Interest Rate | Borrowers with good credit generally qualify for lower rates because they’re considered less risky by lenders | Borrowers with bad credit may pay higher interest rates to offset the lender’s increased risk |
| Approval Odds | A good credit score increases the likelihood of loan approval because it shows a history of good financial habits | A bad credit score can lower the chance of loan approval or lead to less flexible lending terms |
| Loan Terms | Since good credit indicates you’ll repay your debt on time, lenders may be more willing to lend you more money and for longer terms. | Since bad credit indicates you’ve had trouble paying your debts on time, lenders may be hesitant to lend you large amounts and may only offer short terms. |
How Much Do Credit Scores Matter When Applying For A Personal Loan?
Credit scores are a significant factor when applying for a personal loan, as they can impact your chances of approval and the interest rate on the loan. That said, your credit score matters more when you apply with a bank, and may not hold as much weight if you apply with an alternative lender.
Traditional Lenders
Lenders like banks place a lot of weight on credit scores to gauge your creditworthiness. A high credit score significantly increases your chances of personal loan approval, while a bad credit score hampers your ability to get a personal loan with a bank.
Banks also use your credit score to determine the interest rate to offer you and the loan amount to provide. If you have a high credit score, your interest rate will likely be lower and you may qualify for larger loan amounts.
That said, banks consider other factors too, such as your income, employment history, and debt levels, though a high credit score is a key factor in your ability to get a loan at an affordable rate and favourable loan conditions.
Alternative Lenders
Alternative lenders such as online and bad credit lenders, your credit score doesn’t matter as much. While these lenders may look at your credit score, they look at your overall financial situation. If you have bad credit, you may still be able to get approved if you meet their income, employment, and/or collateral requirements.
That said, a low credit score will likely mean less flexible terms and a higher interest rate.
| Why Do Credit Scores Matter? Your credit score represents your likelihood of paying your debts on time, which lenders use to evaluate the risk of lending you money. Credit scores are calculated using factors such as payment history, debt amount, age of credit history, credit types used, and new credit checks. A higher score indicates a lower risk for lenders, which can lead to lower rates and better loan terms. |
Other Personal Loan Factors That Affect Approval
Several other factors besides your credit score impact your ability to get approved for a personal loan, including the following:
- Income: Your income affects loan approval because it indicates your ability to repay the loan. A higher income often means higher approval chances and better loan terms.
- Debt-To-Income (DTI) Ratio: Your DTI affects loan approval as it shows lenders how much of your income goes toward debt payments, and how much is available to make loan payments. A lower DTI indicates a better ability to repay the loan.
- Employment Stability: The stability of your job affects loan approval because it shows how reliable your income source is. If you have stable work, you’d be considered a lower risk for loan default and have a better chance of getting approved.
- Collateral: If you secure your personal loan with a valuable asset, this would provide security to the lender, which would reduce the lender’s risk. This can lead to easier approval and possibly lower interest rates.
- Your Loan Request: Lenders evaluate whether the loan amount requested is reasonable based on your financial situation. Unusual or large loan requests might make it more difficult to get approved.
Learn more: Personal Loan Requirements: How To Qualify For A Personal Loan
How To Increase Your Credit Score To Get Approved For A Personal Loan
With a higher credit score, you have a better chance of getting approved for a personal loan with a lower rate and better terms. If your credit score is a little on the low end, consider taking some time to give it a boost. Here are a few steps you can take to help improve your credit:
Make Your Bill Payments On Time
Your payment history is a common and often crucial component of your credit score calculation. As such, paying your bills on time can help increase your credit score. Debt payments, service bills, including certain cellphone provider bills can contribute to your payment history.
Keep Your Credit Card Balances Low
Your credit card balances have a direct effect on your credit utilization ratio, a factor that commonly plays an important role in your credit score calculation. By keeping your credit card balances low, you can increase your credit score by reducing your credit utilization ratio. This shows that you’re only using a small amount of your available credit.
Use Credit Building Tools
If you’re looking for extra ways to build your credit, consider using a credit building tools, such as the following:
KOHO Credit Building Program
The KOHO Credit Building program includes a small line of credit that you can use to make monthly payments towards, which are reported to the credit bureaus. This reporting of timely payments helps you improve your credit score. The program does not require a hard credit check and guarantees approval.
Learn more: KOHO Credit Building Review
Spring Financial Credit Building Program
Spring Financial’s credit building program is called The Foundation, which helps you build credit by making small payments over 12 months. These payments will then be reported to the credit bureaus, while also automatically saving a portion of your payments for you. Upon successful completion of the program, you’ll have up to $750 saved and you’re guaranteed a $1,500 Evergreen Loan.
Learn more: Review: Spring Financial – The Foundation
Bottom Line
Having a good credit score significantly increases your chances of getting approved for a personal loan with a lower rate and favourable loan terms. That said, you may still be able to secure a personal loan even with bad credit if you apply with an alternative lender that specializes in bad credit loans, but you’ll pay more for your loan without good credit.
