Do Personal Loans Affect Credit Score?

Whether you're planning a wedding, renovating your home, or managing an unexpected expense, a personal loan can offer quick financial relief. But a common question that arises is: Does taking a personal loan affect your credit score? If you're unsure about the link between a personal loan and credit score, this guide will help you understand what to expect.

How Does a Personal Loan Affect Credit Score?

The simple answer is yes! Personal loans do affect your credit score, and the impact can be either positive or negative, depending on how you manage the loan.

Here’s how:

1. Applying for a Personal Loan Triggers a Hard Inquiry

Whenever you apply for a personal loan, the lender checks your credit report to assess your creditworthiness. This is known as a hard inquiry or hard pull. While one or two inquiries won’t affect your score too much, multiple loan applications within a short period may lead lenders to view you as a credit risk, which can lower your credit score.

2. On-Time Repayments Help Improve Your Credit Score

If you’ve been wondering how a personal loan affects credit score in the long run, the answer lies in your repayment behaviour. Timely EMI payments are reported to credit bureaus and help build a positive credit history. Since payment history accounts for a significant portion of your credit score, regular on-time payments can have a positive impact.

3. Late Payments Can Hurt Your Score

On the flip side, missing even a single EMI can negatively affect your credit report. Over time, this can reduce your credit score and make future borrowing more difficult. So, while a personal loan can be helpful, it requires disciplined repayment.

4. Improves Credit Mix

Credit mix refers to the variety of credit types you hold, such as credit cards, home loans, or personal loans. Lenders prefer a healthy mix because it shows that you can manage different kinds of credit responsibly. So, if you’ve only used credit cards so far, taking a personal loan can diversify your credit portfolio, positively influencing your score.

5. Increases Credit Utilisation if Used Wisely

A personal loan can indirectly reduce your credit card utilisation rate if you use it to pay off high credit card debt. A lower utilisation ratio is good for your score. However, this only works if you don’t rack up credit card balances again post-consolidation.

Are Personal Loans Bad for Credit?

Not necessarily. Many people ask, “Are personal loans bad for credit?” The truth is, they can be either beneficial or harmful based on how they’re managed. Personal loans are not inherently bad for your credit score, but poor repayment habits, taking on too much debt, or borrowing more than you can handle can damage your credit profile.

How Much Does a Personal Loan Affect Your Credit Score?

There’s no one-size-fits-all number. How much a personal loan affects your credit score depends on several factors: your existing credit profile, repayment behaviour, the loan amount, and your credit history length. Typically, a personal loan can cause a small dip initially due to the hard inquiry, but it may boost your score over time with consistent repayments.

Do Loans Affect Your Credit Score Negatively?

All kinds of loans, including personal loans, do affect your credit score. However, whether the effect is negative or positive ultimately depends on how you manage them. Responsible borrowing, timely payments, and avoiding excessive debt will always keep your credit score in check.

Final Thoughts

A personal loan can be a smart financial tool when used wisely. So, does a personal loan affect credit score? Yes, but it's not a bad thing. In fact, it can help your score when used to build credit history or manage debt efficiently.

Before applying, consider your repayment capability and ensure you borrow only what you need.