You can also use a personal loan to build and improve your credit history, as long as you have a solid credit history and can qualify for loan terms and interest rates that won’t cost too much. There are a number of factors having and paying back a personal loan can influence, but it’s important to use the funds wisely or risk negatively affecting your score.
We found 5 options for your requirement
7.99% - 35.99%Est. APR Range
$2,000 - $36,500Loan Amount
2-6 yearsLoan Term
Good For: Fast funding
8.49% - 35.99%Est. APR Range
$1,000 - $50,000Loan Amount
2-7 yearsLoan Term
Good For: Low loan amount
8.99% - 35.99%Est. APR Range
$2,000 - $50,000Loan Amount
3-5 yearsLoan Term
Good For: Getting funds quickly
9.95% - 35.99%Est. APR Range
$2,000 - $35,000Loan Amount
1-5 yearsLoan Term
Good For: Getting funds quickly
11.69% - 35.99%Est. APR Range
$1,000 - $50,000Loan Amount
3-5 yearsLoan Term
Good For: low income criteria, fast funds
What is a personal loan?
A personal loan is a type of installment loan you can take out from a bank, credit union, or online lender and use the funds for just about any reason. Personal loans can be a good financing option because not only can they be used to pay for things like medical bills, vacations, a wedding, home improvements, car repairs, debt consolidation and more, but they typically are unsecured and come with fixed terms and interest rates, making them easy to budget for and calculate repayment.
Personal loan amounts range from $1,000 to $100,000 with repayment terms ranging from 12 to 84 months. Terms and interest rates depend on factors like the lender, your credit score and history, income, and others, but typically if you have an excellent credit score you will get a lower interest rate.
Learn More: Everything You Need to Know About Personal Loans
How do personal loans work?
After applying and being approved for a personal loan, the funds will be deposited as a lump sum into your bank account and they can then be used just like cash for whatever you need financed. You’ll then start making monthly payments every month to repay the loan. Keep in mind that the loan will accrue interest, so it’s important to repay the loan within the designated term. Because most personal loans have fixed interest rates, your monthly will be the same.
Learn More: How Do Personal Loans Work?
How to get prequalified for a personal loan?
When shopping for personal loans and comparing lenders, it’s important to get prequalified when you can. This doesn’t affect your credit score but can give you a better idea of your estimated interest rate, loan term, monthly payments, and other information. While this isn’t a guarantee, it can help you more accurately compare your options.
Getting prequalified is easy. In some cases you may receive prequalified offers in the mail with a code and instructions for applying. In other cases, you can use the lender itself or a loan aggregation website. Enter basic information about yourself and get a personalized list of solutions.
Learn More: Pre-Qualified Personal Loans
How can you use a personal loan to build credit?
Your credit score is important – it can affect rates you get on a loan or other funding, whether you’re approved for an apartment or mortgage, and even your insurance rates. If your credit score could use some work, one of the ways to improve it could be by taking out a personal loan.
A personal loan is debt, so this may sound counterintuitive, but the loan can help with a few of the most important factors that influence your credit score:
- Payment history: Because it makes up 35% of your score, it’s important to make your payments on time. This shows you’re a responsible borrower and can help build your credit.
- Credit utilization: Credit utilization, which makes up 30% of your score, is the amount of revolving credit you’re using divided by the total amount of credit you have available. A “good” utilization ratio is typically less than 30%. If you’re taking out a personal loan to consolidate debt or pay off credit card balances, this lowers your credit utilization.
- Length of credit history: Length of history makes up 15% of your score, and having a longer credit history can help show your responsibility with credit over time. If you don’t have any other credit, a personal loan can help start the process of building your credit profile.
- Credit mix and types: Making up 10% of your score, how much debt you have and what kind of debt it is helps show how well you manage credit. Having varying types of credit, like credit cards, personal loans, auto loans, and/or student loans, can help boost your score because you’re showing you’re able to handle a variety of credit products.
Overall, if you’re using a personal loan to build credit, it’s critical to make the monthly payments on time each month. This, along with lowering your debt-to-income ratio and credit utilization, helps show you’re responsible with borrowed funds. Having a mix of different types of credit, and having a longer credit history, can also help prove you’re a responsible borrower and that you manage credit well, all of which will improve your score.
On the other hand, if you make late payments or miss payments completely, this can significantly decrease your credit score.
Risks of using personal loans to build credit
Using a personal loan to build credit can be a good option depending on your credit score and history, income, ability to repay the loan, debt-to-income ratio and other factors. However, there are some risks to carefully consider before getting a loan.
1. Negative impact to credit
When you apply for a loan, it triggers a “hard credit inquiry” on your credit report. When this happens, your credit score will decrease by a few points for a short period of time (typically a few months). However, this will remain in your report for two years. Applying for one loan won’t have too much of an impact, but if you’re shopping and triggering multiple hard inquiries, this can have a serious impact.
Additionally, if you’re not able to repay the loan and make late payments or miss payments altogether, this can bring down your score significantly. It’s important to ensure you can afford the payments before applying.
Personal loans can help build credit, but remember it’s still a type of debt. You should never apply for the loan if you can’t afford it or without a purpose. And, while you have the loan, you should put a larger focus on budgeting and limiting spending that can accumulate more debt.
3. Interest rates and fees
If you’re using a personal loan to build credit, you probably don’t have a great credit score. This means you likely won’t qualify for the lowest interest rate, so it’s important to shop around and find the best interest rate you qualify for. This will save you money in the long-term.
Additionally, most loans have fees associated with borrowing. These can include origination fees, late payment fees, prepayment penalties, and more. Most of the time they aren’t too much, and some you can avoid by being a responsible borrower, but you should still know what fees are associated with the loan to avoid being blindsided.
Why you should think twice before using a personal loan to build credit?
In addition to the reasons listed above, like having to pay higher interest and fees or damaging your credit even more with late or missed payments, there are a few additional reasons to ensure you’re carefully considering the implications of getting a personal loan.
For example, some small, short-term loans can be dangerous and costly. For example, payday loans, pawn shop loans, or car title loans typically have significantly high interest rates, very short repayment terms, and you often risk losing collateral if you can’t repay the loan. Plus, it’s easy to get into a vicious cycle of debt with these loans. It’s best to avoid them if possible.
Additionally, not all personal lenders report to the major credit bureaus, so borrowing from them wouldn’t actually help your score. Make sure the lender you borrow from does so that your activity can help improve your credit.
When it’s right to get a personal loan?
It may be right to consider a personal loan if:
- You have a large event or purchase that needs financing, debt to consolidate, or you want to improve your credit.
- You’re able to qualify for a decent interest rate based on your credit score and other factors.
- You can afford the monthly payments.
- You’re able to compare lenders to find the best one for you.
- You’ve explored alternatives to ensure a personal loan is the right one for your situation.
Related: Reasons to Get a Personal Loan
Personal loan alternatives for building credit
Depending on your current credit score and history, a personal loan may not be the best option for building credit. High interest rates, unfavorable terms, or other downsides to personal loans may outweigh the positives if you’re just using it to build credit. Plus, some personal loan lenders don’t report to the major credit bureaus, so your activity wouldn’t even help.
There are alternatives to a personal loan that can still help you build credit that may be a better choice depending on your financial situation, including:
1. Credit-builder loans
These loans are designed specifically for borrowers who are looking to build credit. Instead of receiving the loan funds, the lender would deposit the sum into a locked savings account. Over the next six to 24 months, you’ll make monthly payments and the lender will report this to the credit bureaus.
After the loan term is over, you receive the full loan amount plus any interest accumulated from the savings account.
Interest rates for these loans can vary, but one through a federal credit union cannot be more than 18%.
2. Credit cards
If you have no credit, or limited credit history, you may qualify for an unsecured credit card or student credit card (if you’re in school). While these charges have high interest rates, you avoid this if you pay off your bill in full and on time each month.
If you can’t or don’t want to get your own card, you can get added as an authorized user on a family member or friend’s card account, so the activity with the account can also show up on your credit report and improve your score.
3. Existing credit
If you have an auto loan, student loan, mortgage, credit card, or other type of loan already open, you can use these existing accounts to improve your credit instead of taking on a new loan.
4. Peer-to-peer loan
If you have poor credit, consider applying for a peer-to-peer loan (P2P). Instead of getting a loan at a bank or credit union, you borrow from individuals who are strangers. This takes place on an online platform that connects borrowers with investors, who supply the funds and you’d repay as you pay off your loan.
Related: How Does Peer-to-Peer Lending Work?
5. Home equity loan (HEL) or home equity line of credit (HELOC)
This loan or line of credit lets you borrow against the value in your home. If you have equity in your home already, you may qualify for a low rate. However, be sure you’re able to repay the debt; otherwise, you could lose your house.
Dos and Don’ts of using a personal loan to build credit
Personal loans for bad credit
It’s possible to be approved for a personal loan even if you have poor credit (300-579), but it can be more difficult and more costly. The lower your credit score, the higher the loan’s interest rate will be, so the more money you’ll pay over time. You’ll likely find better rates with online lenders than banks or credit unions.
You can also explore secured loans instead of unsecured loans. A secured loan has collateral backing the loan, like a vehicle, so you’re considered less of a risk and lenders are more likely to approve your application. Secured loans also may have lower interest rates for those with bad credit than unsecured loans.
Related: Secured vs. Unsecured Personal Loans
Adding a cosigner to your loan can also improve your chances of getting approved, as this adds a responsible borrower to your loan and helps guarantee payment.
Some lenders have minimum credit score requirements, often around 580, but if you qualify, a small personal loan can help improve your credit as long as you make the payments on time.
FICO®, which is the most used credit scoring system, breaks credit scores down into five categories, ranging from “poor” to “excellent.” The full breakdown is below:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Excellent
Lenders consider anything in the “poor” or “fair” range to be “bad credit.” That doesn’t mean you can’t get approved for a personal loan if your score falls in those ranges. Fair credit scores are often approved, but the fees and interest rate will be higher. Applicants with “poor” credit may not get approved. Speak with a credit counselor if you’re in that situation.
How to compare personal loan lenders?
When comparing personal loan lenders, there are several factors to consider. For example, you’ll want to pay attention to:
- Whether the loan is secured or unsecured, or if you need a cosigner.
- Interest rates, including if they are fixed or variable, and what rate you qualify for.
- Fees such as origination fees, late payment fees, and prepayment penalties.
- The loan amounts because some lenders have minimums and maximums.
- The loan terms can range and vary by lender.
- Special features, such as discounts or financial coaching that may be available through the lender.
- Customer service ratings and reviews in the event you have questions or need assistance.
Getting prequalified is a great way to get an accurate estimate of your interest rate, amount, term, and monthly payments so you can compare lenders more easily. You can compare banks, credit unions, and online lenders.
Most lenders offer this information on their website, or you can use a site like Credello to compare features and information side-by-side. Check out lenders and solutions that will meet your needs.
Get the best quick loan options for your needs
We provide solutions you’re likely to get approved for
Factors to consider when comparing personal loan lenders
In addition to those listed above, other factors to consider include:
- Minimum credit score requirements: If you don’t have the minimum credit score, you won’t qualify. If you’re using a personal loan to build credit, you may have to do some extra shopping to find a lender who will accept your score.
- Payment options: Check how the lender will accept your monthly payments. For example, you may be able to submit a check or pay online, or set up an automatic withdrawal from your bank account to ensure you never miss a payment.
- Speed of funding: Some lenders have same-day or next-day approval and funding, though others may take longer (up to a week). Depending on how fast you need funds, this could be important.
Learn more: Features to Look For In a Personal Loan
How do I apply for a personal loan to improve my credit score?
Applying for a personal loan can be done in-person at a bank or credit union, or online for most lenders. The process won’t take long and will go smoother if you prepare ahead of time and know what to expect. The steps to apply for a personal loan include:
- Check your credit score. Know what your score is to ensure you meet minimum credit score requirements.
- Compare lenders. Research rates, terms, fees, ratings and reviews, loan amounts, and other factors as listed above.
- Get prequalified. It’s not a guarantee, but it will give you a more accurate estimate of what you qualify for with each lender.
- Apply. Once you’ve chosen the right lender, complete the application. In most cases, you’ll need to provide:
- Proof of identification
- Proof of address
- Proof of income
- Bank account information
- Proof of employment
- Personal information like name, address, phone number, birth date, and Social Security number
- Information about the loan
- Accept the loan. If approved, you’ll be sent loan documents to finalize and accept.
- Get the funds. The final step is the lender depositing the funds into your bank account.
Learn more: How to Apply for Personal Loans?
A personal loan will help your credit score as long as you make the monthly payments on time every month and pay off the loan within the designated term. While your score will temporarily decrease after applying due to the hard credit inquiry, it will quickly rebound, and you can use the loan to continue to build your credit.
Lenders report payments on their own schedule, typically every 30 to 90 days. Most lenders report monthly payments monthly, so your loan will show up on your credit report when you make your first monthly installment payment.
There are bad credit lenders who will approve you if you have a credit score of 600, but you’ll pay more in fees and a higher interest rate than good credit borrowers.