There’s no mystery to it: A personal loan affects your credit score much like any other form of credit. Make on-time payments and build your credit. Any late payments can significantly damage your score if they’re reported to the credit bureaus.
Here’s how getting a personal loan can impact your credit score at each step of the process.
Shopping for a personal loan
Many lenders allow you to pre-qualify for a personal loan with a soft credit check, which is a routine check of your creditworthiness. A soft inquiry won’t affect your credit score and allows you to shop for the best rates and terms.
Some banks and credit unions do not offer a soft check with pre-qualification. If you want to compare rates, opt for lenders that offer the soft check.
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Applying for a personal loan
Formally applying for a personal loan triggers a hard credit check, which is a more thorough evaluation of your credit history. The inquiry usually knocks up to five points off your FICO credit score. A hard inquiry typically stays on your credit report for two years but only affects your score the first year.
Getting a loan
New credit accounts make up 10% of your FICO score. If you’ve opened several new accounts in a short span of time, getting a new personal loan could cause your credit score to dip.
A new loan may also shorten the average age of your total credit history. Length of credit history represents 15% of your FICO score, and a longer credit history is considered better than a shorter one.
If you don’t have any other installment loans, a personal loan will diversify your credit mix, which makes up 10% of your score. Successfully managing a mix of different types of credit — such as installment loans, credit cards and retail accounts — benefits your credit score.
Repaying a personal loan
Both FICO and VantageScore, another credit scoring model, consider payment history the most important factor in calculating credit scores, making up 35% and 41% of your score, respectively. Making payments on time can build your score.
Reputable lenders report repayment activity to at least one of the three national credit bureaus — Equifax, Experian and TransUnion. Working with a lender that reports to all three can mean more consistency across your credit reports.
Missing a loan repayment
Missing a due date by a few days may not affect your credit, but lenders can report payments that are more than 30 days late to the credit bureaus, leading to notable damage to your credit score.
Establishing a budget that accounts for all your debt repayments, including your personal loan, can help you avoid missed payments. Set up automatic payments to ensure you pay on time.
Consolidating your debt
Consolidating high-interest credit card debt into a personal loan can improve your credit by lowering your credit utilization. Your credit utilization ratio — how much of your available credit you use — is an important factor that helps determine your overall credit score.
Debt consolidation can also simplify your finances and help lower your monthly payments so you can pay off the debt sooner.
Frequently asked questions
Does a personal loan hurt your credit score?
Your credit score can dip a few points when you formally apply for a personal loan, but missed payments can cause a more significant drop. Getting a personal loan will also increase the amount of debt you owe, which is one of the factors that make up your credit score.
Does a personal loan help your credit score?
Consistent, on-time payments toward your loan can help you build credit. A personal loan also adds installment credit to your report, which differs from the revolving credit associated with credit cards. Credit mix makes up 10% of a FICO credit score.
FAQs
Hard credit checks temporarily lower your credit score by as much as 10 points. But if you have excellent credit, applying for a loan will most likely make your score drop by five points or less.
Is a personal loan bad for your credit score? ›
Your credit score can dip a few points when you formally apply for a personal loan, but missed payments can cause a more significant drop. Getting a personal loan will also increase the amount of debt you owe, which is one of the factors that make up your credit score.
How many points does a personal loan inquiry affect credit score? ›
How do hard inquiries impact your credit score? A hard credit inquiry could lower your credit score by as much as 10 points, though in many cases, the damage probably won't be that significant. As FICO explains, “For most people, one additional credit inquiry will take less than five points off their FICO Scores.”
What credit score do you need to get a $30,000 loan? ›
Requirements to receive a personal loan
This allows them to look at your history from the past seven years and see whether you've typically made payments on time. For a $30,000 loan, you'll typically need a credit score above 600 just to qualify or above 700 to get a competitive rate.
Will paying off a personal loan help my credit? ›
Paying off a loan can help reduce your debt-to-income ratio, but if it will also temporarily reduce your credit score, it could be worth keeping the loan if your DTI is low enough as-is.
Do personal loans help build credit? ›
Though they're a form of debt, personal loans can also serve as a tool to build credit. This is because they can contribute to your payment history and credit mix, as well as lower your credit utilization ratio. Collectively, these three factors account for 75 percent of your credit score.
What is a disadvantage of a personal loan? ›
Personal loans often come with a slew of different charges. Some loans charge a prepayment penalty that impacts borrowers who plan to pay back their loans early. Others may charge an origination fee that's typically between 1% and 6% of the loan amount. There may also be fees for missed or late payments.
Is there a risk to a personal loan? ›
Yes. Most personal loans require a hard credit check that can lower your credit score by up to five points. In addition to inquiries, failing to pay your loan on time could lower your credit score once the late payment is reported to the three major credit agencies.
Do personal loans affect your taxes? ›
Personal loans aren't considered income, so you usually don't pay taxes on them. While a personal loan provides you with a lump sum of money that you can spend like income, you must repay it, which makes it a liability rather than taxable income.
Can I use a personal loan to buy a car? ›
Personal loans offer high borrowing limits of up to $100,000 for eligible borrowers and can be used for nearly any purpose, even buying a car. However, higher interest rates and tighter credit requirements may mean a personal loan isn't your best option to buy a car. Find the best personal loans with Experian.
Using more of your credit card balance than usual — even if you pay on time — can reduce your score until a new, lower balance is reported the following month. Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed.
Do personal loans affect home buying? ›
Yes, getting a personal loan before buying a house can impact your mortgage application. Any debt you have listed on your credit reports can affect your ability to get a mortgage loan.
How hard is it to get a personal loan for $30,000? ›
In general, lenders extend $30,000 loans to borrowers with good to excellent credit, which is typically 670 and higher. But there may be lenders who lend to borrowers with bad credit. If you're having difficulty qualifying, you may consider getting a cosigner or co-borrower to help you get approved for the loan.
What is the average monthly payment on a $30000 loan? ›
Monthly payments for a $30,000 personal loan
| Loan duration | Average monthly payments ($30,000 loan) | |
|---|
| Poor credit | Good credit |
|---|
| 1–12 months | $3,066.00 | $2,838.06 |
| 13–24 months | $1,441.88 | $1,375.83 |
| 25–36 months | $1,017.58 | $966.83 |
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| Loan Amount | Loan Term (Years) | Estimated Fixed Monthly Payment* |
|---|
| $25,000 | 5 | $514.57 |
| $30,000 | 3 | $926.18 |
| $30,000 | 5 | $608.15 |
| $35,000 | 3 | $1080.54 |
13 more rowsHaving a personal loan likely won't make or break your chances of getting approved for a mortgage loan. If you're concerned and want to increase your chances, there are several things you can do.
Do personal loans look bad to lenders? ›
A personal loan can impact your mortgage application and approval. Like any debt that appears on your credit reports, how you manage a personal loan will impact how lenders view the debt and your creditworthiness.
