Use one to consolidate debt, pay for unexpected expenses, or make home improvements.

By Roxanna Coldiron
March 09, 2021
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Personal loans are one of the ways that you can achieve your financial goals and improve your credit score. "Personal loans can be more manageable than other types of credit since they come with fixed interest rates, terms and payments," explains Colleen McCreary, chief people officer of Credit Karma. "After you've paid the loan in full, the loan ends and your account is closed." That said, even people with great credit scores will see a variance in the terms that they are offered, so it's important to make sure that you understand what you are getting into before agreeing to the loan. "Every year, millions of Americans use personal loans to consolidate debt, pay for unexpected expenses, make home improvements, and more, McCreary adds. "The best first step is to think about what you need the money for so you can choose the loan type that is most beneficial for your financial situation." A lender will look at your credit to determine your loan terms, which adds a hard inquiry to your credit report and affects your credit score by lowering it a few points.

Interest rates and fees are other facts that you want to review before signing the dotted line. "Rates typically range from around five percent to 36 percent, depending on the lender and your credit," adds McCreary. "In general, the better your credit, the lower your interest rate will be. And the longer your loan term, the more interest you're likely to pay." Some loans even penalize you for paying it off early; this is called a prepayment penalty. The loan repayment terms also make a difference. Longer repayment terms may mean that your monthly payment is lower but it also means a more expensive loan because of all the interest that you'll pay. "Be mindful of your loan repayment term," says McCreary. "Even if you lower your interest rate, there's a chance your personal loan could cost you more if you stretch out your repayment period for too long."

Figure out the total costs of your loan and whether it still helps you to meet your goals before you accept it. Once you take the money from the loan, you are bound by the terms and required to pay it back—not doing so will damage will your credit.

With all of this in mind, what are the best personal loans for your credit score level?

Excellent or Good Credit

The definition of excellent or good credit depends on which score is used to determine your loan terms. "For context, FICO and VantageScore Solutions create the most widely used consumer credit scores, and these companies update their scoring models from time to time," explains McCreary. "From FICO, a good score range is 670 to 739, a very good score range is 740 to 799, and an exceptional score range is 800 to 855. From VantageScore 3.0, a good score range is 661 to 780, and an excellent score range is 781 to 850."

Good or Fair Credit

"A fair credit score range for FICO s is 580 to 669, VantageScore 3.0 it's 601 to 660. If you fall into the fair-to-good credit range, you're more likely to get approved for financial products, and may be able to shop around and compare options among different lenders," she says. "But you still might not get the best terms. Make sure you do your research before committing to a personal loan in order to compare the terms."

Poor or Limited Credit (Less Than 550)

It's much harder to get approved for a personal loan, or any types of credit, with a poor credit score. But you should still look for the fairest terms before accepting a loan. "Before resorting to expensive forms of borrowing, like payday loans, consider looking for lenders that will work with people with bad credit. Just make sure your loan amount fits your budget and read your loan terms to understand if you're facing any fees, such as an origination fee," says McCreary. "Make it a point to incorporate your credit health into your financial plan. Things like on-time payment history and low credit utilization can help improve your score over time, helping you eventually find a loan with more favorable terms."

Keep in mind that you are never guaranteed personal loan approval, even with an excellent credit score, so results will vary if you apply for any of these loans. Consult with a financial advisor if you have additional questions, need clarification, or are unsure of whether a loan is right for you.

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