What Credit Score Do You Need for an Installment Loan?
To qualify for one, you’ll need to have a strong credit history. Moreover, borrowers with better credit may qualify for better loan terms, like larger borrowing limits and lower interest rates.
In this article, we’ll dive into the credit score you need to qualify for a loan, and how your credit can impact the loan terms you ultimately receive.
Minimum Credit Score for a Personal Loan
While there’s no universal minimum, data collected from the personal finance website NerdWallet indicates that the minimum credit score for a personal loan among online lenders is around 620.
This falls within the range of “Fair'' credit and is lower than the average U.S. credit score of 714. NerdWallet’s figure excludes traditional bank lenders and lenders with no explicit minimum credit score, however, so it may deviate from the true average.
It’s important to remember that your credit score is not the sole determinant of being approved for a personal loan. Even if your credit score exceeds the minimum at a certain lender, approval may ultimately be contingent on factors including employment history, debt-to-income ratio, and the status of existing debt.
With that said, there’s no escaping the importance of a strong credit score. The interest rate you pay on the loan (usually described in terms of an “annual percentage rate” or APR) can significantly differ depending on your credit history.
What is the Average APR on an Installment Loan?
According to data from the Federal Reserve, the current average interest rate on a personal installment loan is just over 12% for a 24-month loan (as of November 2023). Depending on an individual’s credit and finances, though, the APR can differ significantly from this average.
LendingTree, a loan aggregation company, provides some valuable insight as to the terms you can expect on personal loans. The table below shows the average APR and loan amount by credit range, calculated by gathering data from certain online lenders.
|Credit Score Range
|Average Loan Amount
|Less than 560
Source: LendingTree (based on closed personal loans from the first quarter of 2023)
As you’d expect, having a strong credit score tends to improve the installment loan terms you’ll be offered. A higher credit range is associated with a lower APR and a higher borrowing limit. While improving your credit score can take time and discipline, there are a number of reliable strategies that can improve the likelihood of securing a future loan.
Potential Ways to Increase Your Credit Score
To get approved for an installment loan, having strong credit is key. In this section, we’ll break down the major factors influencing your credit score and how you can take steps to improve each one.
Payment History (35%)
The biggest portion of your credit score is your payment history. Failing to make the minimum payments on your existing debt can significantly affect your credit score. To improve this aspect of your credit score, stick to a disciplined budget that keeps your existing debt in good standing.
Credit Utilization (30%)
Your credit utilization is the amount of debt you have outstanding divided by the credit you have available. Note that this factor is mostly influenced by revolving credit accounts, like credit cards. Paying down existing debt and applying for higher credit limits can improve your credit utilization.
Length of Credit History (15%)
The length of your credit accounts plays a role in your credit score, although this can be a difficult factor to actively improve. With that said, avoid closing down older credit cards since these can increase the average length of your accounts.
Credit Mix (10%)
Having a healthy mix of credit accounts can improve your credit score. Note that new credit “types” may bring the score up, so applying for multiple credit cards won’t do the trick. Instead, a healthy mix includes both installment debt (like mortgages or personal loans) and revolving debt (like credit cards).
New Credit (10%)
One frustrating aspect of borrowing is that looking for new credit can temporarily lower your credit score as a result of “hard inquiries.” However, multiple inquiries over a small period of time are usually grouped together as rate shopping. Moreover, some lenders only perform “soft inquiries,” which don’t impact your credit score.
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