How Does a Personal Loan Impact Your Credit?

  • Taking out a personal loan can impact credit scores.
  • A hard inquiry can drop the score slightly.
  • Missing a payment can negatively impact a person’s credit score.
  • It can also positively impact a score if paid on time. 

Know These Four Important Facts Before Taking Out a Personal Loan

( – Sometimes it’s necessary to take out a personal loan to pay for an unexpected expense or make a big purchase. It’s not uncommon for people to take out a loan to consolidate debt, start a business, or purchase items they need when they move to a new home. That’s why loans are available in the first place.

Before signing on the dotted line, it’s important for a person to make sure a personal loan is the way to go for their unique financial situation. It’s also critical that they know how the loan will impact their credit and ability to enter into other loan agreements.

Hard Inquiries

Taking out a personal loan will affect a person’s credit. First, when applying for the loan, the lender will run a credit check, which has a very low impact on a person’s credit score. That is what’s called a hard inquiry or a hard pull. This process tells the lender everything about how a person has handled debt in the past, including whether they pay their bills on time, how much debt they have, and if they have derogatory marks on their credit history. All of that information helps a lender decide how much credit to extend to the person applying for the loan.

A hard inquiry doesn’t usually have any noticeable impact on a person’s credit score, unless someone applies for several loans or credit instruments in a short period of time.

Amounts Owed

Taking out a personal loan will add to the total amount of money a person owes. Typically, just owing more money won’t impact a person’s score in a negative way, but it could if it’s coupled with high credit card balances and large balances owed on the loan.

Also, something to keep in mind is that the loan is added to the debt-to-income ratio, which doesn’t usually impact the score, but could make it harder to get a mortgage or auto loan.

Missing a Payment

After the loan is approved, it’s very important to make all of the payments on time. Missing payments will absolutely impact a credit score. In fact, payment history accounts for 35% of a FICO score.

On the bright side, if a loan is paid on time, it can positively impact their score because other lenders will see positive payment history.

Copyright 2022,