Are personal loans for fair credit borrowers a good financial option? If the answer is yes, then what personal loan interest rates can borrowers expect?
To answer that question we first have to figure out what “fair” credit really is. According to Fair Isaac, developer of the FICO-brand score, the average credit score last year reached 704, a record.
What is fair credit?
FICO scores have a range from 300 to 850. If 704 is average then scores from 705 to 850 are above average and scores below 704 are, um, less than average.
We all know there are 36 inches in a yard. Both inches and yards are standard measures. There are no debates regarding what they mean.
The story with “fair” credit is different. Lender Smith might see a 660 score and think of it as fair. Lender Jones might see the same 660 score and see it as good. Good credit scores — like art — are in the eye of the beholder.
Experian, one of the three major credit reporting agencies, breaks down credit score ranges like this as of 2019:
And here is a look at how many people fall into each credit grade.
Personal loans for fair credit
What about a personal loan if you have fair credit? Can it make sense?
A personal loan typically has several features:
- Unlike a mortgage or a vehicle loan, a personal loan is unsecured. There is no home to foreclose or car to repossess
- Your word, credit standing, and personal finances determine how much you can borrow and the rate
- Smaller personal loans can be easier to get because they represent less risk
- A personal loan has a set term and usually a fixed rate. You pay the same amount each month. At the end of the loan term, the entire debt is repaid
- Personal loans typically last one to five years, but they can be longer
- The longer the loan, the lower the monthly payment
- The longer the loan, the higher the total interest cost
Personal loan interest rates
Personal loan interest rates vary significantly. Credit scores are a big issue. If you have fair credit, the odds are that you are 28 times more likely to be delinquent then someone with a credit score of 800 and above. As a result, you can expect to pay a high rate of interest. Rates today vary between 6% and 36%. The better your credit, the lower your rate.
As of this writing the average personal loan interest rate is just under 11%. The average credit card rate is about 17%.
Finding the best personal loan for fair credit
Can you get a personal loan at a low cost with fair credit? Maybe.
First, visit AnnualCreditReport.com. You can get a free copy of your credit reports from each of the three big credit reporting agencies.
Second, check your reports. Are there any factual errors? Are there any out-of-date items? Generally, derogatory entries become less important over time and drop off in seven years (10 years for bankruptcies). Clean up your credit reports before shopping for a personal loan.
Third, shop around for the best rates and terms. Check with multiple lenders because rates vary much more widely than they do for financing like mortgages.
Fourth, you may be able to pay less if you can persuade someone to co-sign with you. That means, however, that you must be extra-vigilant about repaying on time every month. Or you could damage a relationship that’s worth a lot more than the amount of your loan.