How Personal Loans Affect Your Credit Score (2024)

A personal loan can affect your credit score in a number of ways⁠—both good and bad. Taking out a personal loan isn't bad for your credit score in and of itself. However, it may affect your overall score for the short term and make it more difficult for you to obtain additional credit before that new loan is paid back.

On the other hand, paying off a personal loan in a timely manner should boost your overall score. If you decide to take one out, be sure to research and compare all of your options thoroughly in order to qualify for the best possible loan.

Key Takeaways

  • Your overall credit rating could be lowered temporarily when you take a personal loan because you have acquired additional debt.
  • In the short term, you also may not be able to get another loan or open another credit card.
  • However, repaying the loan on time will not only bring your credit score back up, but it can also help build it over time.

How Applying for Loans Affects Your Credit Score

Your credit score is calculated based on five factors: payment history, amounts owed, length of credit history, new credit, and credit mix. The exact percentages vary among the three major credit rating agencies, but according to FICO, 10% is based on any new debt or newly opened lines of credit, and another 10% is based on credit mix—the number of credit lines that you have open (including secured credit cards). As such, obtaining a new personal loan could affect your credit rating. Your outstanding debt total has now increased, and you have acquired new debt.

Credit agencies also take note of new financial activity. If, for example, you tried to apply for an auto loan shortly after taking out a personal loan, your application might be rejected on the basis that you already have as much debt as you can handle.

Your overall credit history has more impact on your credit score than a single new loan. If you have a long history of managing debt and making timely payments, the impact on your credit score from taking out a new loan is likely to be lessened. The easiest and best way to keep a personal loan from lowering your credit score is to make your payments on time and within the terms of the loan agreement.

The three major credit reporting bureaus in the United States that lenders turn to—Equifax, Experian, and TransUnion—provide similar scores on your creditworthiness, but there can be small differences.

How Do People Use Personal Loans?

Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

How a Personal Loan Can Boost Your Credit Score

A personal loan that you repay in a timely fashion can have a positive effect on your credit score, as it demonstrates that you can handle debt responsibly.

Unfortunately, those who are the most averse to taking on debt could have lousy credit scores. After all, a person who never acquires debt and pays it off in installments has no payment history.

You can receive a free copy of your credit reports from the three credit bureaus every 12 months, which you can obtain by visiting

What Credit Score Is Needed for a Personal Loan?

FICO scores fall into five categories—poor, fair, good, very good, and exceptional. Here's a breakdown of the ranges:

  • Poor (<580): Below average, and lenders will consider you a risky borrower.
  • Fair (580–669): Below average, but many lenders may still approve loans with this score.
  • Good (670–739): Near or slightly above average, and most lenders view this as a good score.
  • Very Good (740–799): Above average and shows lenders that you are a very dependable borrower.
  • Exceptional (800+): Well above average, and lenders will view you as an exceptional borrower.

The higher your credit score, the more likely a lender is to approve your loan application and offer more favorable terms, such as a lower interest rate. While each has its own criteria, in general, lenders view scores above 670 as an indication that a borrower is creditworthy.

Also keep in mind that while your credit score plays a crucial role in helping you qualify for a personal loan, lenders also consider other factors like the amount of incomeyou earn, how much money you have in the bank, and how long you have been employed.

Finding the right loan can be particularly stressful when you face a financial emergency and need to borrow money in a hurry. If you have the additional obstacle of bad credit, accessing cash quickly may seem even more daunting. Fortunately, you may still be able to secure an emergency loan even when you have credit problems.

What Can I Use a Personal Loan For?

Money acquired from a personal loan can be used for a variety of things. Some examples include using it to pay your tax debts, finance home renovations, or cover an unexpected medical emergency.

What Rate Will I Get for a Personal Loan?

Your loan rate will depend on your credit score and credit history. The higher your score and the better the history, the lower your interest rate and monthly payments will be. The average rate for a 24-month personal loan was 12.17% in Aug. 2023.

Does Taking Out a Personal Loan Hurt my Credit Score?

Your credit score will take a slight hit when you apply for a loan, as the lender takes a hard look at your credit. However, if you make your payments on time, your credit score should improve.

How Personal Loans Affect Your Credit Score (1)

The Bottom Line

A personal loan will cause a slight hit to your credit score in the short term, but making on-time payments will bring it back up and can help improve your credit in the long run. A personal loan calculator can be a big help when it comes to determining the loan repayment term that's right for you.

Your credit score will be hurt if you pay late or default on the loan. And don't forget that a personal loan may also reduce your borrowing power for other lines of credit.If you've recently taken out a personal loan and accidentally made multiple late payments or defaulted on said loan, one of the best credit repair companies might be able to help remove the negative marks on your credit report.

How Personal Loans Affect Your Credit Score (2024)


How Personal Loans Affect Your Credit Score? ›

Personal loans can boost your credit score by adding to your credit mix, improving your credit utilization and your payment history. Applying for a personal loan can hurt your credit score temporarily by adding to your current debt, and missing payments can lower it further.

How much will a personal loan affect my credit score? ›

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.

Do personal loans fall off credit report? ›

A personal loan can stay on your credit report anywhere from a few years to up to a decade, depending on how you managed your debt. Missed payments may remain on your report for seven years, while bankruptcies and closed accounts that you've paid in full could stay on your report for a decade.

Does paying off a personal loan increase credit score? ›

Your successful payments on paid off loans are still part of your credit history, but they won't have the same impact on your score. When you close the account, you will now have fewer open accounts and less account diversity. If you paid your loan off early, your history will reflect a shorter account relationship.

Can I get a personal loan without affecting my credit score? ›

Pre-qualifying for a personal loan shows your likelihood of approval without affecting your credit score. You can get pre-qualified offers from multiple lenders to compare rates and terms. Use pre-qualified offers to determine whether the monthly loan payments will fit your budget.

What credit score do you need to get a $30,000 loan? ›

You will need a credit score of 580 or higher to get a $30,000 personal loan in most cases, along with enough income to afford the monthly bill payments. Other common loan requirements include being at least 18 years old, being a U.S. citizen or a permanent resident, and having a valid bank account.

Why did my credit score drop after getting a personal loan? ›

Hard inquiry on your credit: Due to the hard credit check, you will likely see a short-term drop in your credit score when you formally apply for the loan. While this may not be detrimental to your long-term credit score, it could cause some harm to your credit if you apply for multiple loans in a short time.

Is a personal loan a good way to pay off debt? ›

A personal loan can help you consolidate your debt into a single, lower-interest loan, which may save you money in the long run. Likewise, if you have multiple credit cards with balances, it can be overwhelming to keep track of them all.

What happens if you pay off a loan early? ›

Paying off the loan early can put you in a situation where you must pay a prepayment penalty, potentially undoing any money you'd save on interest, and it can also impact your credit history.

How long do personal loans stay on your credit? ›

If you miss a payment on your loan, even just once, your score could drop up to 180 points. Even after you've paid off your personal loan, the account will stay on your credit report for up to 10 years.

What happens if you get a loan and don't use it? ›

If it's an unsecured personal loan (meaning no collateral was involved), most lenders don't care what you do with the funds. However, a debt consolidation loan is an exception, because it was granted for a specific purpose.

Is a credit score of 650 good? ›

As someone with a 650 credit score, you are firmly in the “fair” territory of credit. You can usually qualify for financial products like a mortgage or car loan, but you will likely pay higher interest rates than someone with a better credit score. The "good" credit range starts at 690.

Can I pay a personal loan off early? ›

In most cases, you can pay off a personal loan early. Your credit score might drop, but it will typically be minor and temporary. Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history.

What credit score do I need for a $5000 loan? ›

Requirements for a $5,000 loan vary by lender. But in general, you should have at least Fair credit, which is a score of 580 or above. Lenders may also look at other factors, such as your income and your debt-to-income ratio (DTI), during the application process.

How big of a loan can I get with a 550 credit score? ›

Lenders specializing in bad credit score loans may be willing to approve loans up to $50,000. These loans will typically have much higher interest rates and origination fees.

Will my bank approve me for a personal loan with bad credit? ›

While it is possible to get approved for a personal loan if you have poor credit, the final decision, for the most part, rests with the lender you apply to. Some lenders will tell you upfront what their minimum requirements are.

Does a personal loan affect buying a house? ›

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.

What credit score is good enough for a personal loan? ›

Many give preference to borrowers with good or excellent credit scores (690 and above), but some lenders accept borrowers with bad credit (a score below 630). The typical minimum credit score to qualify for a personal loan is 560 to 660, according to lenders surveyed by NerdWallet.

What loan does not affect credit score? ›

Summary of no-credit-check lenders
LenderLoan typeLoan amount
OppLoansHigh-interest installment loan.$500 to $4,000.
Possible FinanceHigh-interest installment loan.Up to $500.
EarninCash advance app.Up to $100 per day; up to $750 per pay period.
AfterpayBuy now, pay later app.$200 to $2,000.
Jan 10, 2024

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