Do personal loans hurt your credit score?
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.
| Loan Event | How Much Your Credit Score Is Affected |
|---|---|
| Hard inquiry | A drop of 1 – 5 points |
| Missed payments | A drop of up to 180 points |
| Paying off the debt | Varies based on payment history and standing with the personal loan and lender |
| A delinquent account | A drop of 50 – 150 points |
Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history. The benefits to paying off a personal loan include reducing your debt-to-income (DTI) ratio and saving on interest over the course of the loan.
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.
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.
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.
Personal loans can be a great way to consolidate credit card debt and get a lower interest rate. Credit card debt can quickly turn into a cycle of never-ending payments. Thankfully, there are several solutions if you're looking to get ahead of your debt and pay it off faster.
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.
It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.
And much like with any other loan, mortgage, or credit card application, applying for a personal loan can cause a slight dip in your credit score. This is because lenders will run a hard inquiry on your credit, and every time a hard inquiry is pulled, it shows up on your credit report and your score drops a bit.
Is it better to have a loan or credit card debt?
Personal loans tend to have lower interest rates than credit cards and are geared toward large, one-time expenses. Taking out a personal loan makes the most sense when you know you can make the monthly payments for the full length of the loan.
Most negative items should automatically fall off your credit reports seven years from the date of your first missed payment, at which point your credit score may start rising. But if you are otherwise using credit responsibly, your score may rebound to its starting point within three months to six years.
| Lender | Loan type | Loan amount |
|---|---|---|
| OppLoans | High-interest installment loan. | $500 to $4,000. |
| Possible Finance | High-interest installment loan. | Up to $500. |
| Earnin | Cash advance app. | Up to $100 per day; up to $750 per pay period. |
| Afterpay | Buy now, pay later app. | $200 to $2,000. |
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.
If you decide that you don't want or need a loan once you have received the funds, you have two options: Take the financial hit and repay the loan, along with origination fees and prepayment penalty. Use the money for another purpose, but faithfully make each monthly payment until the loan is paid in full.
| Lender | Loan Amounts | Credit Score Requirement |
|---|---|---|
| Upstart | $1,000 - $50,000 | None |
| Oportun | $300 - $18,500 | None |
| OneMain Financial | $1,500 - $20,000 | None |
| RISE | $500 - $5,000 | None |
Maintaining a credit score of at least 670 will improve your chances of qualification. However, if you want to receive the most favorable terms, we recommend a minimum score of 720. Consistent and steady monthly income. Minimum income requirements may vary drastically between lenders, with some having no requirements.
The monthly payment on a $30,000 loan ranges from $410 to $3,014, depending on the APR and how long the loan lasts. For example, if you take out a $30,000 loan for one year with an APR of 36%, your monthly payment will be $3,014.
| Loan Amount | Loan Term (Years) | Estimated Fixed Monthly Payment* |
|---|---|---|
| $20,000 | 5 | $415.07 |
| $25,000 | 3 | $771.81 |
| $25,000 | 5 | $514.57 |
| $30,000 | 3 | $926.18 |
While paying down high-interest debt will help you reduce the amount of interest you owe, not having an emergency fund can put you deeper in the red when you have to cover an unexpected expense. “Regardless of [your] debt amount, it's critical that you have money set aside for a rainy day,” Griffin said.
How much personal loan debt is too much?
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.
Personal loan repayment terms typically range from two to five years and can go as high as seven years, or lenders may offer other terms. And you might be able to choose the term length that works best for you.
You can pay off a personal loan faster by putting a lump sum of extra money toward the principal, paying extra each month, or making biweekly payments instead of monthly payments, among other strategies.
It's important to know that paying off a loan early doesn't impact your credit any differently than if you were to pay it off on time. But it's true that paying off a loan can affect your credit score for better or for worse, depending on your credit profile overall.
