Explain: How Does a Personal Loan Affect Your Credit Score?

Oct 27, 2022 By Susan Kelly


Your credit score can be impacted positively or negatively depending on how you manage a personal loan. Getting a personal loan won't hurt your credit score if you use it responsibly. A new loan can improve your credit in the long run, but in the short term, it could lower your score and make it harder to get new credit. However, timely repayment of a personal loan should improve your credit rating. Before applying for a loan, you should do some serious comparison shopping to ensure you get the most favorable terms.

How Does a Personal Loan Impact Your Credit Score?

Make sure your credit is in good shape before you apply for a loan. You can boost your acceptance odds and possibly get the best interest rate if you work on your credit report and score before applying. When deciding on a repayment plan, it's important to find one that won't put too much strain on your finances. You may need to negotiate a longer repayment period with reduced monthly installments to repay your loan on time. Your credit rating will take a nosedive if you can't manage to work the payments into your monthly budget and pay them on time consistently.

How a Personal Loan Can Help Your Credit

In several ways, personal loans can aid in raising your credit rating.

Contributing To A Better Credit Mix

You can improve your credit score by using various credit options. An individual loan is a form of an installment loan (meaning you pay it off in regular monthly installments). If you have primarily revolving credit, like credit cards, a personal loan can help diversify your credit profile.

Helping You Build A Payment History

If you have a personal loan, paying it back on time will greatly improve your credit score. (The most important thing is to ensure that you will be able to pay back the loan on time and in full every month.)

Reducing Your Credit Utilization Ratio

Unlike revolving credit, personal loans don't affect your credit utilization percentage because they are paid back over time. Paying off high-interest credit card debt with a personal loan can benefit your credit score because the personal loan is an installment loan, not a revolving line of credit.

How Personal Loans Can Hurt Your Credit

Get ready to apply for a private loan. Let's slow down there. You should also be informed of the cons associated with personal loans.

Creating An Inquiry On Your Credit Report

A credit check is performed on all applicants, whether they seek a personal loan or another form of credit. A hard inquiry will be made on your credit report, which will have a negative impact on your score. The credit score drop from a single hard inquiry only lasts a few months, but multiple inquiries at once can do greater damage. Applying for many personal loans at once can have a negative impact on your credit score, but spreading them out over two weeks will help you avoid this penalty because credit scoring algorithms consider this to be "rate shopping" and hence do not penalize you for doing it.

Getting You Deeper In Debt

Borrowing money for one's use is equivalent to taking on additional debt. Personal loans can be used to settle high-interest debt, but only if you also try to alter the behaviors that led to your financial predicament. If you have a credit card that is close to its limit and you use a personal loan to pay it off, but then you start charging more than you can afford on that card again, you might easily find yourself in the same position as before, except now you have two debts to deal with.

Additional Fees

Personal loan costs include the interest you'll pay and things like origination fees and late payments. Be careful to read up on all associated costs before applying. The costs could be substantial, so financing their payment might be necessary.


In the short term, taking out a personal loan can lower your credit score, but making your payments on time will help you recover and improve your credit. It's crucial to make timely loan payments. Finding the most suitable loan payback period might be difficult, but a personal loan calculator can assist. If you make payments late or stop paying for the loan altogether, it will have a negative impact on your credit score. It's also important to remember that taking out a personal loan could affect your eligibility for other types of credit. If you have recently taken out a personal loan and have fallen behind on payments, a good credit repair company may be able to help.

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