Personal loans for average credit score
If your credit score is average at best, you could still qualify for a personal loan.
Just because you have a few dents in your credit score it doesn’t mean that you are ineligible for a personal loan. Find out how you can apply for personal loans if you have an average credit score.
Understanding personal loans for people with an average credit score
If you have an average credit score – for whatever reason – you may think that you are ineligible for a personal loan. Not too long ago, when the big banks were the only major players in the personal loan industry, it could be very difficult for people with average credit to obtain finance.
Today, however, the rise of alternative and online lenders has given new hope to people with bad credit histories. Having average credit means that you are seen as high risk for a lender. For this reason, lenders typically charge higher interest rates when offering a personal loan to someone with an average credit score. In a similar way, self-employed people and first home buyers are also sometimes considered high risk and attract a correspondingly high interest rate.
Compare personal loans for borrowers with an average credit score
What is an “average” credit score?
Your credit score is a number, usually between 0 and 1,000, that equates to a rating on a five-point scale from “weak” to “excellent.” In order to calculate your credit score, credit reporting agencies compile your personal and financial information.
They include the level of credit you have borrowed in the past, the credit limits and debt you currently have, the volume of applications for credit you have made, and any defaults on previous credit repayments or unpaid utility bills, among other information.
Depending upon the credit reporting agency, your credit score could be as high as 1,000 or 1,500. The average credit score for New Zealand adults is approximately 500, which is considered “average.”
A credit rating of 500 or higher will put you in the “good” or “excellent” categories, while anything lower than 500 will be considered “fair” or “weak.”
What personal loans can I get with an average credit score?
- Unsecured personal loans. An unsecured personal loan can potentially be available to a person with an average credit score. Since you won’t be required to put up an asset as security for the loan, interest rates will be higher than for a secured personal loan. Having a guarantor can help your chances of approval. Without a guarantor, the lender can take legal action against you in the event that you default on your repayments.
- Peer-to-peer personal loans. Peer-to-peer personal loans involve a third-party lender who facilitates the matching of private, individual investors with potential borrowers. Rather than lenders and borrowers working in a one-to-one relationship, the third-party platform invites investors to finance loans in a portfolio, classified by their level of risk. As such, peer-to-peer personal loans offer risk-based pricing, in which higher interest rates apply to people with poor credit ratings.
- Car loans. One of the defining features of a car loan is that the loan is secured by the value of the car. However, when the loan applicant has an average credit score, the interest rate could potentially be higher than for an applicant with a good credit score.
What will my interest rate be?
One of the defining features of personal loans for people with average credit scores is that risk-based pricing is typically used by lenders to determine the applicable interest rate for the loan. Risk-based pricing occurs when the lender does not offer a set interest rate for a loan but instead gives an interest rate range.
When an application is made by a potential borrower, the lender will assess the suitability of the borrower, taking into account the borrower’s credit score. If the lender decides to make a loan offer to the borrower, they will nominate an interest rate within that range, which reflects the level of risk that is deemed to be applicable.
For example, a lender may advertise interest rates between 12.99% p.a. and 19.99% p.a. Once a loan application has been made, if the lender decides to make a loan offer, an interest rate closer to 12.99% p.a. might be offered to an applicant with a “good” or “excellent” credit rating that is deemed to be low risk. However, an offer closer to the lender’s upper limit of 19.99% p.a. might be made to an applicant with average credit.
In addition to your credit score, the lender will take into account the proposed loan amount and loan term, and your financial history, employment history and personal circumstances.
How do I compare my personal loan options?
It can be more difficult to compare loan products with risk-based pricing because, until you put in an application with a particular lender, you don’t know what interest rate you’re going to be offered. Consider the following factors when comparing personal loans:
- Interest rate range. While you don’t know the specific interest rate you could be offered, you can still take the rate range into consideration when comparing loans.
- Security. Is the personal loan secured or unsecured? If you have residential property to offer as security, you could be offered more favourable loan terms than with an unsecured personal loan.
- Fees and charges. Ensure that you are familiar with application fees, ongoing fees and early repayment fees. These may or may not be linked to the interest rate you are offered.