How Personal Loans May Affect Your Credit

Before You Apply: Hard Inquiries

When you formally apply for a personal loan, most lenders conduct a hard credit inquiry. Hard inquiries typically lower your credit score by a few points and remain on your credit report for two years. If you are rate shopping, submitting multiple applications within a short window (often 14–45 days) may be treated as a single inquiry by some credit scoring models.

Some lenders and marketplaces use a soft inquiry for pre-qualification, which does not affect your score. Check with the lender about what type of inquiry they perform.

After Approval: New Account Effects

Opening a new loan account may temporarily lower your score for several reasons:

• New credit age: A new account lowers the average age of your credit accounts.
• Credit mix: Adding an installment loan may improve your credit mix if you previously only had revolving credit (credit cards).
• Credit utilization: Personal loans do not directly affect credit card utilization, but if you use the loan to pay off credit cards, your revolving utilization may decrease significantly.

During Repayment: Payment History

Payment history is the most significant factor in most credit scoring models. Making on-time payments each month can strengthen your credit profile over time. Missing payments or defaulting on a personal loan can cause significant, long-lasting damage to your credit.

After Repayment

Repaying a loan in full is generally positive for your credit, though the account and its payment history will remain on your report for years.

Key Takeaways

• Applications may cause a temporary small score decrease from hard inquiries.
• Consistent on-time payments are the most effective way to build credit through a personal loan.
• Missing payments can have lasting negative consequences.

This article is for educational purposes only and does not constitute financial advice.