Personal loans can be used for a variety of expenses, including weddings, vacations, home repairs and even as a way to cover emergency costs. There are a ton of lenders out there that cater to an assortment of needs and financial circumstances, including those who have fair or poor credit scores and still need to take on a loan to finance a large purchase.
While this can help more people get access to this financial product, there are still some big advantages to making sure your credit score is as healthy as possible before you apply for a personal loan.
You can qualify for lower interest rates on a personal loan
When applying for any new line of credit with a lower credit score, you’re likely to receive a higher interest rate, which means it’ll be more costly for you to borrow money. This also rings true when it comes to applying for personal loans.
Remember that your credit score can provide lenders with clues as to how likely you are to repay borrowed money on-time and in-full. So lenders see individuals with lower credit scores as “riskier” borrowers and will therefore offer them interest rates toward the higher end of the lender’s range.
But when you apply for a loan with a higher credit score, you’re seen as a “less risky” borrower who is likely to repay your loan amount on-time and in-full. Therefore, lenders feel more comfortable offering you a lower interest rate on your loan, which means it’ll be cheaper for you to borrow that money.
You won’t need to apply with a co-applicant
A co-applicant is someone who applies for the loan with you and is equally responsible for paying back the full loan amount. Co-applicants are often also known as co-borrowers, and they can usually be added onto your personal loan application form.
When applying for a personal loan, it’s common for lenders to analyze your credit history, debt-to-income ratio and other credentials during the process to determine the size of your loan, your interest rate and the length of your loan term. Applying with a co-applicant who has a higher credit score than you can help you get approved for a lower interest rate and other more favorable loan terms.
However, not all personal loans allow you to apply with a co-applicant. SoFi Personal Loans allows for co-applicants and offers loan amounts between $5,000 and $100,000. LightStream is another lender that gives borrowers the ability to apply with a co-applicant, and borrowers can take advantage of a 0.25% APY discount if they sign up for autopay.
Also keep in mind that your co-applicant would need to feel comfortable being on the hook for the responsibility of managing the loan with you, and a co-applicant is most beneficial when their credit score is higher than yours.
But if your credit score is already in the good or excellent range, you should feel comfortable moving forward without a co-applicant — that’s another advantage to improving your credit score before submitting an application.
How to improve your credit score
Much like with any new line of credit, personal loans should be carefully considered before you submit your application and decide to use it for funding an expense. While you weigh your options, though, you might want to take a few steps to improve your credit score.
Paying your bills on time is the most important thing you can do to help raise your score. FICO and VantageScore, which are two of the main credit card scoring models, both view payment history as the most influential factor when determining a person’s credit score (it accounts for 35% of your credit score). For lenders, a person’s ability to keep up with their credit card, utility, student loan, mortgage and medical debt payments indicates that they are capable of taking out a loan and paying it back.
Next, you should try to lower your credit utilization rate. Your credit utilization rate is your total credit card balance divided by your total amount of available credit. So if you have a limit of $5,000 and you have a $2,500 balance, your credit utilization rate is 50%. Experts typically recommend keeping your total CUR below 30%, and below 10% is even better. You can lower this rate by paying down your balance or asking your credit card issuer to increase your credit limit.
Another good way to improve your credit score is to keep an eye out for any discrepancies on your credit report. Errors on your credit reports could be hurting your score. While it may seem unlikely that your reports would be flawed, 26% of participants in a study by the Federal Trade Commission (FTC) found at least one error on their reports that could make them appear riskier to lenders.
You can proactively monitor your credit and receive three free credit reports (one from each bureau) annually at annualcreditreport.com. Select also rounded up the best credit monitoring services: ranking CreditWise® from Capital One as the best free service and IdentityForce® as the best paid service with more extensive features.
