What is a good credit personal loan? And how do you qualify for one?

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If you need to borrow money, having a good credit score can work in your favor. Not only will you have access to a bigger pool of lenders, but you also have higher odds of getting the best personal loan rates and terms.

But even if you have good credit, there are a few factors to consider before applying for a personal loan. These include your overall financial health and monthly budget, as well as how much money you need and whether or not what’s being offered to you fits your exact needs.

What are good credit personal loans?

A good credit personal loan generally comes with more competitive loan terms than you would get with fair or bad credit, including:

• Lower interest rates.
• Longer repayment periods.
• Higher maximum loan amounts.

Personal loans currently have an average interest rate of 12.18 percent. However, standard interest rates on personal loans can range from about 8 percent to 36 percent. If you have good credit, you could qualify for a loan with an interest rate below 12 percent.

Although having good credit can help you secure a lower rate, that doesn’t mean you’ll get the lowest rate available. Those rates are generally reserved for borrowers with excellent credit — FICO scores above 800.

What is a good credit score?

Your credit score expresses how well you’ve handled credit in the past. It assesses factors like your payment history, amounts owed and credit mix.

The most popular credit score model used by most lenders is FICO. These scores go from 300 to 850. If you have good credit, that means you have a credit score between 670 and 739. Anything above that is considered either “very good” or “exceptional.”

Lenders may also use the VantageScore model, under which good credit ranges from 661 to 780.

Lenders often give you better terms and interest rates if you have a good credit score. They believe borrowers with good credit pose a lower risk of default. That means they’re more likely to repay their debts than those with negative marks on their credit report.

Where to get a good credit personal loan

Good credit loans are available through three types of lenders: banks, credit unions and online lenders.

• Banks: Banks cater to borrowers with good or excellent credit scores. They offer larger loans and terms that range from 24 to 72 months in many cases. Some banks also offer perks to current account holders, like interest rate reductions, to help maximize savings.
• Credit unions: You’ll need a membership to apply for a personal loan from most credit unions. Their loans often come with similar terms as banks but lower interest rates. The national average rate on a three-year, unsecured, fixed-rate personal loan is 10.78 percent for credit unions. It’s 11.37 percent for banks, according to the National Credit Union Administration.
• Online lenders: Online lenders generally feature a streamlined digital application process, rapid approvals, and funding times. Many also offer personal loan prequalification to view your loan offer without affecting your credit score. Online lenders often have more flexible lending criteria than traditional banks., Some even consider factors like your educational background and job history for approval.

How to get a good credit personal loan

The process of applying for a good credit loan is basically the same as applying for any other type of personal loan.

1. Check your credit. Get a copy of your credit report to know where you stand with creditors. If you see something amiss, such as a closed account that is marked as open, file disputes with each of the credit bureaus (TransUnion, Equifax and Experian) to have the discrepancies removed. It can take up to 30 days for a bureau to respond. Once they do, you could see your score increase.
2. Shop around. It’s never ideal to settle for the first personal loan option you find. Do some research to identify personal loans from traditional banks, credit unions and online lenders that could meet your needs.
3. Get prequalified. Get prequalified online with at least three lenders to view potential loan offers without impacting your credit score.
4. Compare loan offers. When comparing your options, be mindful of the interest rates, loan terms, fees and funding times each lender offers. Also, take note of any perks, like autopay discounts.
5. Gather your documents. Most lenders will request several documents. Collect a copy of your government-issued ID, proof of address, most recent pay stubs or bank statements and information about your employer.
6. Apply for a loan. Complete the final application and send over the documentation the lender requests to make a lending decision. Many lenders provide same-day or next-day lending decisions, and some offer rapid funding options.

How to decide if a good credit loan is right for you

Personal loans are a big financial decision. Consider the benefits and drawbacks of a personal loan before applying and ask yourself the following:

• Do you have a solid credit score? If so, do you qualify for a competitive interest rate?
• How do you plan to use the funds? Is there an urgent need for a personal loan, or could you save the money you need over time?
• Do you have enough wiggle room in your budget to afford the monthly loan payments? Have you used a personal loan calculator to make this determination?
• Do you plan to consolidate high-interest debt? If so, do the savings outweigh the borrowing costs you’ll incur with a personal loan? Are you disciplined enough with your spending to avoid racking up more credit card debt once you’ve cleared the balances?

Your answers to these questions will help determine if a personal loan makes financial sense or if you should explore other options.

Common requirements for a good credit personal loan

Especially when it comes to loans for good credit, many lenders will consider factors outside your credit score.

Lenders often consider your income. While some simply want to see a stable source of income, others may require you to meet a specific income threshold.

Your existing debt and how it compares to your income matters, too. If your debt-to-income (DTI) ratio is high, you may struggle to get approved. Lenders prefer a DTI under 36 percent. That means currently, no more than about a third of your monthly gross income goes toward paying your debts. Some allow up to 50 percent.

Alternatives to a good credit loan

A personal loan isn’t the only way to access the funds you need. Some viable alternatives include lines of credit, credit cards, tapping into your retirement plan and secured loans.

• Personal lines of credit.

  Personal lines of credit work much like a credit card. You can reuse the funds as you pay down the balance. And, unlike personal loans, you’ll only pay interest on the amount you use, not the total amount available to you.

• 0 percent APR credit card.

  Zero-APR credit cards come with an interest-free introductory period — usually between 12 and 18 months. This can make borrowing more affordable or let you consolidate existing debts. This strategy is best for expenses you believe you can pay off before the introductory period ends.

  Standard credit card: Regular cards are also an option, but be wary. If you carry a balance, the rate is likely higher than you’d get on a personal loan. Some cards may also allow you to withdraw a cash advance, but these often carry higher interest rates — and there’s no interest-free grace period.

• 401(k) loan or IRA withdrawal.

  Borrowing money from your retirement account is usually not advised, as you can miss out on higher earnings. But sometimes, taking out a 401(k) loan or an early IRA withdrawal can make sense. Before you consider this, make sure you understand the fees and conditions associated with this.

• Home equity loans and Home equity lines of credits (HELOCs).

  Both home equity loans and HELOCs allow you to borrow against the equity you’ve built up in your home. They frequently have low interest rates because you use your home as collateral. But because of this, you could lose your home if you default on your loan. However, these can be a great solution for bigger projects such as home renovations.

The bottom line

Good credit personal loans can be a great financing option if you’re tight on money or if you don’t want to tap into your savings. That said, a personal loan is still a form of debt, so it’s important to evaluate your options carefully, as well as your finances before committing to one.