What is a good credit loan?

Delmaine Donson/Getty Images

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 a personal loan with competitive terms and interest rates.

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 is a good credit score?

Your credit score measures how good of a borrower you are by assessing 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.”

Having a good credit score is essential to securing affordable credit products, such as loans or credit cards, as lenders will give you better terms and interest rates. That is because borrowers with good credit represent a lower risk of default, meaning they’re more likely to repay their debts than those who have blemishes on their credit report.

What are good credit loans?

A good credit personal loan generally comes with more competitive loan terms, including low interest rates, longer repayment periods and higher amounts than you would get with fair or bad credit.

Personal loans currently have an average interest rate of 12.10 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 the 12 percent mark.

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 very good and excellent credit — scores above 740. Additionally, lenders will weighother factors, like your income, length of employment at your current job and debt-to-income (DTI) ratio to determine your eligibility and rates.

Where to get a good credit 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.

To illustrate, the national average rate on a three-year, unsecured, fixed-rate personal loan is 10.78 percent for credit unions and 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 prequalification to view your loan offer without affecting your credit score.

You’ll also find that online lenders have more flexible lending criteria than traditional banks, some even evaluating alternative factors like your educational background and job history to approve you for the loan. Additionally, some online lenders also offer lower fees, as they are able to cut operational costs associated with having physical branches.

How to get a good credit 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 appears as open or a paid account that appears past due, file disputes with each of the credit bureaus (TransUnion, Equifax and Experian) to have them removed. It can take up to 30 days for a bureau to respond, but once they do, you could see your score increase by a few points.
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 is offering. Also, take note of any perks, like autopay discounts.
5. Gather your documents. Most lenders will request several documents, including 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 up 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.

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. Lines of credit work just 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 borrow.
• 0 percent APR credit card. These cards come with an interest-free introductory period — usually between 12 to 18 month. This can make borrowing more affordable. These can be an ideal option for smaller expenses, such as a $500 car repair. However, if you have a regular credit card, you can also use that as well. Some cards may also allow you to take a cash advance, but these carry higher interest rates and fees than regular credit card purchases.
• 401(k) loan or IRA withdrawal. Although borrowing money from your retirement account is usually not advised, as you can miss out on higher earnings, there may be instances where 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 are using 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.