I never thought much about credit and interest rates until I couldn’t get a loan. Getting a loan can feel like trying to get access to an exclusive club where a small group of people will determine your fate. It’s not fair but most people just don’t know the factors that determine interest rates and whether you get a loan or not. Having that information will go a long way in getting the money you need at an interest rate you can afford. Check out this graph on interest rate by credit score and other factors that determine rates.
To look at the interest rates by credit scores, I looked at more than 200,000 loans made by Lending Club and Prosper. These are the two largest peer to peer loan lenders and a huge source of data on credit scores, interest rates and loan factors.
The numbers might be skewed a little because of the peer lenders’ requirements. Lending Club requires borrowers to have a 660 FICO credit score or higher while Prosper will accept borrowers with scores of 640 or higher. The Prosper loans included many borrowers with lower credit scores, even as low as 550 FICO, so it does appear that even bad credit loans are available if you have other factors working in your favor.
Another thing to remember when estimating your loan interest rate is the type of loan. I used unsecured personal loans for the article which are going to have higher rates compared to secured loans like mortgages or auto loans.
What Credit Score Factors matter in Getting a Loan?
There are a lot of factors that go into your credit score including payment history, types of credit and how much debt you have available. You can’t do much about most of the credit score factors right now but there are a few things you can fix that will help your chances of getting a loan. We looked at all five credit score factors and how to fix bad credit in this post.
Your best bet in getting a peer loan is to change some of the factors that investors look at to decide whether to fund a personal loan. Every investor is different but my experience talking with peer loan investors has found # factors that matter the most.
- Credit Inquiries: Investors don’t want to see that you’ve applied for lots of loans over the last six months. It makes it look like you’re scrambling for money. Checking your rate on a peer loan won’t affect your score because the lender does a ‘soft’ inquiry but don’t apply for too many loans within six months of trying to get a personal loan.
- Debt-to-Available Credit: This one affects your credit score also so it’s important on several levels. Try getting your limit increased on your credit card. Don’t spend anything extra but it will make it look like you’ve got more money available and not running out of options.
- Successful loans: Investors want to know that they’ll get their money back. Many look for borrowers that have paid off previous peer loans. If you can borrow a small amount and then pay it off early, your rate might improve on your second loan.
We’ll take a deeper dive next week into some of the factors that mean a denied loan. Much of the time, it’s a credit score that doesn’t meet the minimum but there are other factors included unverified income, too much debt compared to your monthly income or too many bad marks on your credit score. Most of the personal loan lenders offer comparable rates and lending standards but your own needs will determine which site is best for you.
- Prosper
makes loans to borrowers with a 580 FICO or higher and no hidden fees makes it a great choice - Lending Club is the largest peer lending site and makes loans to borrowers with a 660 FICO or higher
makes loans to borrowers with a 580 FICO or higher and no hidden fees makes it a great choice
is the largest peer lending site and makes loans to borrowers with a 660 FICO or higherWhat Interest Rate can I get for My Credit Score
Looking into the actual loans made on Prosper and Lending Club, it’s clear that there’s no one factor that will determine the interest rate on your loan. The spreadsheets I downloaded included more than 50 factors about a borrower from occupation to home ownership and financial history.
There are a few factors that stood out as ones that really affected the interest rate on a loan.
- Length of loan: 60-month loans generally mean an interest rate of 0.5% to 1% higher than 36-month loans. If an investor is going to lend for a longer time, they’re going to want a little higher return.
- Debt-to-Income: How much debt you already have compared to your monthly income is a big factor and is also something that goes into your credit score. Borrowers with more debt than they can handle are going to pay higher rates.
- Credit Score: This is going to be the biggest factor. Peer lending sites can add other factors but the FICO credit score is already a strong model of a borrower’s credit history. If your interest rates are too high because of your credit score, get our free report on how I added 140 points to my score.
The graphic estimates the interest rate by credit score on an unsecured personal loan. It’s based on the actual peer loans made but the rate on your actual loan might be a little different depending on other factors. The range only goes down to 600 FICO but you may be able to get a loan if you have bad credit through Prosper.
Just looking at the chart, it’s obvious how important your credit score is when applying for a personal loan. Build your credit and you can get some great rates whether it’s through a peer loan or a mortgage. Destroy your credit and you’ll be stuck paying much higher rates if you need money.
Just a 140-point difference in your credit score can mean an extra 17% on your interest rate. That could mean monthly loan payments that are $125 higher and paying an extra $4,483 in interest on a $15,000 personal loan over three years.
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You may not need your credit score now or may think you’ll avoid debt your whole life. That’s fine and maybe even best for some people but you can’t build your credit score overnight. Take care of your credit and check out some of these 21 steps to increase your credit score. If you ever need a loan, you’ll be happy you took the time to improve your credit and you’ll get the best rates available.
