What Are the Monthly Payments on a $2,500 Personal Loan?

It is estimated that 6 out of 10 Americans live paycheck to paycheck. In other words, they may have enough money to cover basic necessities but nothing more. That means when money is needed for expenses like a new transmission, medical treatment, or surprise tax bill, they must figure out where to find the funds.

As great as personal loans can be when interest rates are low, that is not currently the case. Still, when a person is in a pinch, a personal loan may be the only answer.

Let's say someone must borrow $2,500. Here's how much they can expect to pay, depending on two factors.

Credit score

The first factor that determines how much a borrower pays on a $2,500 loan is their credit score. The reason is simple: The lowest rates are reserved for borrowers with the highest credit scores, and borrowers with low credit scores are charged a higher rate.

When a lender approves a loan applicant with a low score, they worry the loan may not be fully repaid. To overcome their fear of loss, they offer that borrower a higher interest rate.

Credit score ratings

To understand how it works, it helps to know how lenders view credit scores. In this case, we're referring to FICO® Scores, the most commonly used by lenders. Here are the score ranges for FICO:

Credit score impact on payments

As mentioned, the higher the credit score, the lower the interest rate. To illustrate this point, we took a look at how much a borrower would pay today for a $2,500 Discover Personal Loan. While Discover advertises loans starting at 7.99%, the best we could find was 8.99% for a borrower with a perfect credit score of 850 and a loan term of 36 months.

Here's a look at how those credit scores impact the cost of borrowing $2,500 from Discover, a typical personal loan lender.

Term impact on payments

The loan term also impacts the APR and payment. Here's how opting for a 36-month term rather than a 48-month term further impacts loan costs.

Bottom line

Calculating the monthly payment on a $2,500 loan depends on the borrower's unique circumstances, including their credit score and loan term. Whether the lender is a bank, credit union, or fintech company, each has its own formula for determining the interest rates it offers and what it takes to get a loan application approved.

If you're concerned that your credit score is too low to qualify for the interest rate you want, there are steps you can take to give it a boost. Here are some ways to end up with a higher credit score.

• Order a copy of your credit report from all three credit bureaus. You can do it all at once through AnnualCreditReport.com (and this is the only site for free credit reports). Once you have them, comb through each carefully. If you find a mistake, report it to the credit reporting agency in question. In most cases, the credit bureaus have 30 days to prove that the information is correct or remove it from your credit report.
• Continue to pay all bills on time. Payment history accounts for 35% of your FICO® Score.
• Lower your credit utilization. In other words, if you have a credit card with a spending limit of $10,000, using $1,000 of that amount looks better than using $8,000. Creditors want to know that you're careful about using the credit you have access to.
• Improve your credit mix. Creditors also want to know that you can handle different types of credit. If the only credit you have is an installment loan, you may want to apply for a credit card.
• Keep old credit accounts open. As tempting as it may be to close a credit card account because you no longer use it, doing so lowers your total available credit (remember, creditors want to know you have credit but choose not to use it all).
• Pay down debt. This will also improve your credit utilization ratio.

Now that you know how tied your credit score is to how much you'll pay for a loan, you may have all the inspiration you need.