How Personal Loans Affect Your Credit Score (2024)

FAQs

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.