What Credit Score is Needed for an Unsecured Personal Loan?

Unsecured personal loans can be used for a variety of financial purposes, from consolidating high-interest credit card debt, to finishing home improvement projects around the home or working through an emergency.

With an unsecured personal loan, you receive a lump sum from the lender without collateral, such as a vehicle or real estate. However, without collateral, the lender relies heavily on your creditworthiness and income. For this reason, it's important to understand the impact your credit score has on obtaining an unsecured personal loan and what you should know about credit scores and personal loans before you apply.

Average credit score range needed for an unsecured personal loan

The average credit score range needed to obtain an unsecured personal loan depends on the lender.

The rates for personal loans depend on a variety of factors, including your credit score, credit history, length of the loan you're applying for, and other factors. However, you can expect the interest rates to be lower if you have a more favorable credit score.

While the exact interest rate of your unsecured personal loan depends on your personal financial factors, however, according to the National Credit Union Administration in March 2024 the average interest rate for a 36-month unsecured personal loan with a bank was 11.65% and the national average rate with a credit union was 10.83%.

Does getting an unsecured personal loan affect my credit?

Yes, getting an unsecured personal loan can affect your credit in a couple of ways.

During the application process

For starters, when you submit an application to the lender for an unsecured personal loan, the lender may conduct what's called a "hard credit pull" or inquiry. This inquiry is visible on your credit report for up to two years and anyone who has access to your report will see it. A hard inquiry may bring your credit score down by about five points, but the impact typically lessens after the first six months of an inquiry.

Lenders review how many hard inquiries you have on your report because it indicates that you may be seeking excessive credit from multiple sources. The more inquiries the lender sees might indicate you're a higher risk borrower.

When you take out an unsecured personal loan

Once you're approved and receive funds from an unsecured personal loan, the activity will be visible on your credit report. Your repayment history will be recorded every 30 days, so it's vital to make on-time payments as they may positively impact your credit score.

Taking on a loan also impacts your credit mix. An installment loan is a different type of borrowing tool than revolving credit, such as a credit card. You may positively impact your score by having a mix of both installment and revolving credit if you make payments on time.

Taking on an unsecured personal loan can have either a positive or negative impact on your credit score.  It’s important to fully understand the benefits and risks before you sign an agreement.

Pros and cons of unsecured personal loans

Unsecured personal loans have a few advantages, including, but not limited to:

• Flexibility: You can use the lump sum for virtually anything, which gives you greater flexibility with the funds.
• No collateral: With an unsecured loan, you don't have to worry about using a car title or real estate, so these items can't be seized if you are unable to make payments.
• Lower interest rates: If you look at the national average of rates for personal loans, you'll notice it is much lower than credit card interest rates; the national average for a bank credit card currently was 15.29% as of March 2024. Paying less in interest means the overall cost of the loan would be less.
• Fast funding: Some lenders could provide a lump sum as soon as the same day you're approved. Typically, the funding times for personal loans are quicker than other borrowing options.

However, personal loans have drawbacks too, including, but not limited to:

• Higher fees: Unsecured personal loans may include higher fees, such as origination fees and prepayment penalties. These all add to the overall cost of the loan, so it's important to compare fees among lenders.
• Strict eligibility requirements: Because you're not using collateral, an unsecured personal loan has strict eligibility requirements, such as your credit score and income.
• Impacts monthly budget: You'll have to make a monthly payment until the loan is paid off, which can have a negative impact on your monthly finances if you're not careful. Unlike a credit card where you have an option to pay a minimum, your payment for the loan will be fixed.
• Increased debt: You're taking on additional debt by taking out an unsecured personal loan, which could impact both your credit profile and finances.

Options for personal loans if you have a low credit score

If you're concerned your low credit score will keep you from getting an unsecured personal loan, you do have other options:

• Use a co-signer: Some lenders will allow a co-signer with the personal loan, which means they're responsible for payments if you're unable to make them. A co-signer with a stronger credit score may increase your approval chances.
• Work with a lender who specializes in low credit scores: Some lenders will accept lower credit scores by considering other factors besides your credit profile.
• Consider other borrowing alternatives: You may also have access to other borrowing options, such as a 0% APR introductory offer credit card or a personal line of credit from your current financial institution. You may even consider peer-to-peer loans, which are funds provided by individual investors, instead of a financial institution.