4 Ways Your Credit Profile Impacts Your Personal Loan

By Jason Ramin

Whether we like it or not, many aspects of our finances now depend on having a positive credit profile. Everyone from the landlord to the cellphone company will likely check your credit report and use the information therein to make important decisions about your financial future.

Yes, having good credit can save you time, money, and energy in many aspects of life. Just look at personal loans, for example. Your credit profile can impact every aspect of a personal loan, from where you can get the loan to how much you can borrow — and what it’ll cost.

1. The Lenders You Can Use

Before you fill out a single application, your credit can start to impact your ability to get a personal loan. That’s because the lenders you can use will often depend on your credit profile.

Many mainstream lenders — e.g., the big banks and prime lenders — don’t typically lend to consumers with low credit scores. While there isn’t a hard limit here, generally an average FICO credit score below 580 will make a mainstream lender unlikely to approve your application.

This means you may not have the option of heading to the corner bank and getting a loan. Instead, you’ll need to do a little research into both local and online places for personal loans to find ones with flexible credit requirements.

2. Your Approval Chances

Whether you are approved for any given credit product — including a personal loan — will depend significantly upon your credit profile. At its most basic, you credit reports tell lenders how likely you are to repay your loan; a low credit score suggests you are at high risk of defaulting on your debt; few lenders will approve an application for a loan if they don’t think you’ll pay them back.

So, unfortunately, even if you limit your search for a loan to those lenders that specialize in subprime or poor credit borrowers, you may still have trouble securing a loan due to your credit profile. This can be particularly true if your profile contains specific red flags, such as repeated account defaults.

And some negative items can make the hardiest subprime lenders nervous, thus prohibiting you from being approved for credit at all. For example, being in the middle of bankruptcy proceedings usually means no lender will offer you credit, as no one wants to risk being lumped into a potential bankruptcy settlement.

3. How Much You Can Borrow

Although many people may assume that your income is the only thing that determines how much you can borrow, the fact is that your credit history can have as much — if not more — of an impact on the size of your loan as does your income.

Your credit can influence your loan amount for the same reasons as it can impact your approval overall: risk. If your credit profile indicates you are a high risk for default, lenders are going to be hesitant to give you money. And the lenders that will give you money will try to minimize their risk by limiting the amount of money they allow you to borrow.

4. Your Interest Rate

If you think the impact of your credit on your personal loan ends with getting approved, think again. That’s because lenders are still thinking about the high risk of your low credit score — and they’re going to take it out on your interest rate.

When it comes to loans, interest fees are simply the cost of borrowing that money. In other words, interest fees are how the bank makes a profit from lending money to consumers. If you have a good credit history and the bank thinks you’ll repay your entire loan — including all of the interest fees — then the interest rate will be fairly low.

If, on the other hand, you are a high-risk borrower who may default, the lender will charge you a higher interest rate on your loan — just in case. That way, if you default on the loan at some point, the bank has already had a chance to make back some or all of its money through interest fees.

5. How Long Everything Takes

Although there isn’t always a direct relationship between the time it takes to get a personal loan and a borrower’s credit score, it’s likely that many consumers will find the process simpler and quicker when they have good credit. This can be due to any number of factors, including how easy it is to find a lender, the complexity of the application and approval process, or the time it takes for a loan to be funded.