Do Personal Loans Affect Your Credit Rating?

If you are planning on looking into applying for a personal loan, you may be wondering what kind of effect it will have on your credit rating.

If you are wondering if it will have any sort of impact, the short answer is yes. However, when you repay an online personal loan and make each payment on-time, you can end up improving your credit scores in the long run.

How Does the Loan Affect Your Score?

An installment loan can affect your credit just as other types of loans or credit can. Repaying late can end up damaging your credit score and the ability to take out loans in the future.

A lower credit score can also get you less enticing interest rates for the loans you do get approved for.

Loans can affect your score when the following happens:

  • Shopping for an installment loan estimate
  • Applying for loans
  • Regularly paying your loan payments on-time
  • Missing loan payments or paying late
  • Consolidating your debts
  • Shopping for an installment loan

Many online lenders will allow customers to see if they pre-qualify for a loan before submitting a full application. This allows borrowers to see what they may get approved for while only having a soft inquiry on their credit reports.


Soft inquiries will not hurt your credit score and allow borrowers to shop around for the best rates when looking for an online installment loan. Certain lenders do not allow the soft inquiry option.

Applying For Installment Loan

When you formally apply for a loan online, the lender will then perform a hard inquiry to your credit report. This allows them to do a more in-depth look at your credit history to determine your creditworthiness.

Hard inquiries will take points off of your credit score and will remain on your report for up to two years.

Repaying Your Loan

VantageScore and FICO are two credit scoring models that take repayment history very seriously for calculating credit scores for consumers.

Payment history makes up more than 35% of your total score.

It is important to make timely payments towards your loan in order to not damage your credit score and possibly see an improvement over time.

Missing Loan Payments

When you miss one of your loan payments by a few days or more, you will not see any damage to your credit score. Most likely, however, you will have to pay a fee to your lender for paying late.

When it comes to affecting your credit, missing a payment by more than 30 days can start dropping your score.

Figuring out a budget for all of your debts, including your loan, will allow you to avoid missing a payment and hurting your score.

Debt Consolidation

Consolidating your debts into one affordable personal installment loan can help to improve your credit rating.

It will do so by lowering your overall credit utilization ratio.

This ratio shows how much of your total credit is being used and will account for almost 30% of your entire credit score. A mix of different types of credit will also help to improve your score.

Keep Your Eye On Fees

As with any type of loan you apply for, it is important to fully understand the terms and conditions beforehand. Look out for the late fees and origination fees that the loan may come with.


Many lenders charge these fees automatically and they cannot be avoided. Additionally, note the cost of any overdraft and late payment fees.

To avoid paying unnecessary late charges, it is important to establish a solid monthly budget to ensure the minimum amount due for your loan is paid on-time.

Determine Credit Risk Before Applying For A Personal Loan

It is important to take all of the benefits and disadvantages of applying for a loan beforehand.

Taking out a loan may be wise if you are looking to consolidate other higher interest rate loans or are looking to pay for a large purchase such as a home renovation project or car purchase.