Does Getting a Personal Loan Affect Your Credit Score?

A personal loan provides a lump sum for various needs, from debt consolidation to unexpected expenses, with fixed payments over a set period. Most personal loans are unsecured, meaning they do not require collateral. A credit score is a numerical representation of an individual’s creditworthiness, reflecting their history of managing debt and making payments. This three-digit number, often ranging from 300 to 850, helps lenders assess lending risk.

Credit scores are dynamic, constantly adjusting based on new financial activities and repayment behaviors. Understanding how a personal loan interacts with these factors is important for anyone considering this type of financing. The decision to take out and manage a personal loan can influence one’s credit score in several ways, from the initial application to the ongoing repayment process.

The Initial Application Impact

Applying for a personal loan initiates a “hard inquiry” on your credit report, which occurs when a lender requests to review your credit history. This action is recorded on your credit report and can cause a minor, temporary dip in your credit score. A single hard inquiry might reduce a FICO Score by fewer than five points, and its effect generally lasts for about 12 months, although it may remain on your report for up to two years.

Frequent applications for new credit within a short timeframe can be viewed less favorably by scoring models, potentially leading to a more significant cumulative impact on your score. It is important to distinguish hard inquiries from “soft inquiries,” which occur when you check your own credit or when a potential lender pre-screens you for an offer; soft inquiries do not affect your credit score.

Impact of a New Loan on Your Credit File

Once a personal loan is approved, it appears on your credit report as a new installment account. This new account can influence your credit score by affecting the average age of all your credit accounts. Since older accounts generally contribute positively to a credit score, adding a new, young account can slightly lower this average, potentially causing a minor negative impact initially.

Personal loans also play a role in your “credit mix,” which is the variety of credit types you manage, including both revolving accounts (like credit cards) and installment accounts (like personal loans). Credit scoring models consider a diversified credit mix favorably, accounting for approximately 10% of a FICO Score. Introducing an installment loan can positively diversify your credit profile, especially if your credit history previously consisted primarily of revolving credit.

Taking on a personal loan increases your total outstanding debt, a factor considered in credit scoring. While installment loans do not have a credit utilization rate in the same way revolving credit does, the overall amount of debt you carry contributes to the “amounts owed” category, which makes up about 30% of a FICO Score. If the loan is used for debt consolidation, it could lead to a lower credit utilization ratio on those accounts, which can be beneficial. However, the personal loan still adds to your total debt, and managing this new obligation responsibly is important for maintaining a healthy credit profile.

How Repayment Behavior Shapes Your Score

Payment history is the most influential factor in credit scoring, typically accounting for about 35% of a FICO Score and up to 40% of a VantageScore. Consistent, on-time payments on a personal loan demonstrate financial responsibility and build a positive credit history over time. Each timely payment reinforces reliability to lenders, contributing significantly to a healthy credit score.

Conversely, late payments carry severe negative consequences for a credit score. A payment reported 30 days or more past its due date can cause a significant drop in your score and remain on your credit report for up to seven years. The longer a payment is delinquent, the more severe the damage to your score. Even a single late payment can substantially impact your creditworthiness, making it more challenging to secure favorable loan terms in the future.

As the principal balance of an installment loan is paid down, it can positively impact the “amounts owed” category of your credit score. This reduction in outstanding debt demonstrates a decreasing overall debt burden, which is viewed favorably by credit scoring models. Successfully managing a personal loan to full repayment also contributes to the length and depth of your credit history, which accounts for 15% of a FICO Score. This sustained, responsible use of credit showcases long-term financial management, further strengthening your credit profile.