Does Applying For a Personal Loan Affect Credit Score?

If you're thinking about applying for a personal loan, you might be wondering whether applying for a personal loan affects your credit score. We will answer this question in much detail below.

Does Applying For a Personal Loan Affect Credit Score?

Yes, applying for a personal loan does affect your credit score because when you apply for a personal loan, a hard inquiry is added to your credit report when the lender reviews your credit report. A hard inquiry can lower your credit score by a few points. So, a personal loan can lower your credit score regardless of whether you're approved for the loan or denied since a hard inquiry is added to your credit report.

When you apply for a personal loan, your lender will want to review your credit report and take a look at your credit score to assess your creditworthiness in order to determine whether you're likely to repay the loan as originally agreed. When a lender reviews your credit report, a hard inquiry is added to your credit report, alerting future lenders and creditors that you've been seeking to borrow money.

A hard inquiry from applying for a personal loan will appear on your credit report for 2 years from the date you applied for the personal loan. After the 2 year period, the hard inquiry will be removed from your credit report. That said, experts agree that a hard inquiry resulting from a personal loan application will only affect your credit score for 12 months from the date it's added to your credit report. As the hard inquiry ages, its impact on your credit score will lessen.

If you're applying for a personal loan, you likely cannot avoid a hard inquiry because lenders will want to review your credit report to determine whether to lend you money. That said, a hard inquiry will only lower your credit score by just a few points, so it might be worth it for you to apply for a personal loan. That said, you should avoid applying for too many personal loans within a short period of time, because each time you apply, a hard inquiry is added to your credit report.

You should avoid submitting too many personal loan applications and other credit applications because although a single hard inquiry is unlikely to cause a big drop in your credit score, submitting too many applications within a short period of time can significantly lower your credit score.

Can a Personal Loan Raise Your Credit Score?

Yes, if used properly, a personal loan can definitely affect your credit score positively and raise it. For example, if you make all of your personal loan payments on time, this will boost your credit score. This is so because your payment history accounts for 35% of your credit score, so making timely payments will affect your credit score positively, raising it.

Additionally, if you use the proceeds from a personal loan to consolidate your debts by paying off other loans and credit cards, you could see a substantial boost in your credit score. Personal loans are often used to consolidate credit card debts because they have a lower interest rate than credit cards, allowing you to pay down your balances faster since less money is wasted on interest. Whenever you decrease your account balances, your credit score improves. This is so because your credit utilization accounts for 30% of your credit score. So, using the proceeds to pay down your debts faster can improve your credit score.

Furthermore, a personal loan can improve your credit score because it improves your credit mix, which refers to the diversity of debt products that you're using. Your credit mix is factored into your credit score and accounts for 10% of your credit score. So, a personal loan can improve your credit for this reason.

Can a Personal Loan Lower Your Credit Score?

Yes, a personal loan can lower your credit score for a variety of reasons that we will explore below:

First, a personal loan can lower your credit score by a few points because, as mentioned above, a hard inquiry is added to your credit report whenever you apply for a personal loan which is customary when a lender reviews a copy of your credit report for lending purposes. That said, a hard inquiry will only knock down your credit score by a few points, and your credit score will quickly recover soon thereafter.

Second, the status of your personal account is reported to the credit reporting bureaus. If you fail to make your payments on time, you could cause significant damage to your credit score. So, to avoid damage to your credit, you should make all of your payments on time.

Third, if you're taking out a personal loan for a purpose other than consolidating your debts or paying them off, you may cause a drop in your credit score because taking on debt increases your account balances, which is factored into your credit score.

Things You Should Consider Before Applying For a Personal Loan

Let's explore some things that you should consider before applying for a personal loan:

1. Getting into more debt - Before applying for a personal loan, you should think hard about whether you want to get yourself into debt. If you want to take a vacation and need the funds to finance it or want to make an expensive purchase, you should really think about whether you want to get yourself into debt to do so. It might be worth it for you to save up for the item you want to purchase instead of locking yourself into monthly payments for years to come.

2. Interest Rate and Fees - Before taking out a personal loan, you should consider whether your credit score qualifies you for a reasonable interest rate. You should make this consider because if your credit score is low, you may still be approved but at an astronomically high interest rate, which will cause you to have to pay back much more than what you borrowed. So, consider the interest rate you may qualify for before applying.

3. DTI - Before applying for a loan, you should consider your DTI (debt-to-income) ratio. As a rule of thumb, you want your debt to income ratio to be less than 43%. Typically, the higher your DTI, the less likely it is that you'll be approved for a personal loan, and if you're approved, you might be approved at a very high interest rate.

4. Consider you options - Before settling on a personal loan to apply for, you should shop around and research the personal loan that you want. Consider the rates typically offered by lenders and search for one that has the lowest interest rate and most favorable repayment terms.

If after considering these factors you decide that applying for a personal loan is the right move for you, you should review your credit report and credit score to see the impact the personal loan had on your credit. There are plenty of apps and websites that provide you with the ability to check your credit for free.

Frequently Asked Questions (FAQs)

1. Why does applying for a personal loan lower your credit score?

Applying for a personal low may lower your credit score by a few points because when you apply and a lender reviews a copy of your credit report, a hard inquiry is added to your credit report, slightly lowering your credit score.

2. Does applying for a personal loan result in a hard inquiry?

Yes, applying for a personal loan results in a hard inquiry that will remain on your credit report for 2 years, after which it's automatically removed from your credit report.

3. How long does a declined loan stay on your credit file?

A hard inquiry resulting from a declined loan application will remain on your credit file for 2 years from your application date. After the 2 year period, the hard inquiry is automatically removed from your credit report.


If I Apply For a Personal Loan Do I Have to Accept It?

Regardless of the reason why you applied for a personal loan, you might be wondering whether you have to accept a personal loan after applying for it. We will answer this question in much detail below.

If I Apply For a Personal Loan Do I Have to Accept It?

If you apply for a personal loan, you are not required to accept it. This is so because if you're approved for your personal loan, the lender will not disburse the funds to you until you sign a document accepting the loan. So, even if approved, you're not required to accept the funds. For example, if the lender qualifies you for a loan and the interest rate is too high or you did not like any of the loan terms, you are not required to accept it. You can simply decline to sign the loan agreement. You can decline to sign the agreement even if you simply changed your mind as there is typically nothing obligating you to accept the loan.

Having said that, if you believe that you are not going to accept a personal loan, you should avoid applying for it in the first place. This is so because whenever you apply for a personal loan or any type of loan, the lender will have to check your credit report. Whenever a lender checks your credit report, the lender will place a hard inquiry on your credit report, slightly lowering your credit score. Although a single hard inquiry will not lower your credit score by much, applying for too many personal loans within a short period of time will significantly lower your credit score.

If you want to avoid having a hard inquiry placed on your credit report, you should consider contacting the lender and getting pre-qualified for the loan. Prequalification will show you the likelihood that you'll be approved for the loan before you even apply for it, saving you from the trouble of having a hard inquiry added to your credit report. If you do not like the terms, you can avoid applying for the loan in the first place and avoid having a hard inquiry added to your credit report.

That said, not all lenders will allow you to be pre-approved for a loan. Some will require you to apply for the loan to know what terms you qualify for. That said, before you apply for a personal loan, you should do some research to get an idea about the kind of terms that you should expect from the lender.

What Happens If I Do Not Accept a Personal Loan?

If you apply for a personal loan and you're approved for the loan, you are not required to accept it. This is so because even after you're approved for the loan, your lender will not disburse the funds to you until you sign an agreement. If you do not accept a personal loan and you paid an application fee for the loan, that fee is typically nonrefundable. Overall, if you choose not to accept a personal loan after you're approved, you should immediately contact your lender and tell them that you no longer need the loan. Check the agreement or loan application to determine whether you owe any fees for the loan you applied for.

How Can You Apply For a Personal Loan?

Today, it's easier than ever to apply for a personal loan. This applies whether you're applying for a loan through your bank, a credit union, or other online providers of personal loans. Some personal lenders will be willing to work with you to get you pre-approved for the loan, which helps you avoid adding a hard inquiry to your credit report. That said, not all lenders offer a pre-approval process.

If your lender offers a pre-approval process, you should expect to provide some basic information about yourself. The information you'll need to provide includes the following:

  • Name
  • Address
  • Full or partial Social Security Number
  • Employment status
  • Income

After you've provided the lender with this basic information, the lender will conduct a soft credit check to review your credit report. At this point, the lender will have a better idea of your creditworthiness, and will then proceed to put together a quote about the personal loan amount you're pre-approved for, as well as the terms and interest rate that you qualify for. Since this is a soft check, known as a soft pull, it will not lower your credit score as would a hard inquiry had you applied for the loan.

If you like the terms of the loan and want to go ahead and you want to get it, you will have to submit a full loan application that will result in a hard inquiry. Although a hard inquiry will appear on your credit report, a single hard inquiry will only cause a slight drop in your credit score.

Furthermore, when applying for a personal loan, you will usually have to submit the following information:

  • Name
  • Address
  • Full Social Security Number
  • Employment status
  • Proof of income
  • Current banking information
  • Government-issued photo identification
  • The purpose for taking out the personal loan
  • The amount you want to borrow

After you submit the application, the lender will review the information you've submitted, as well as request and review a copy of your credit report and credit scores. If the lenders find that you meet their criteria, they will approve you for the loan and submit a decision to you via email, mail, or telephone call.

When the lender contacts you, they will typically provide you with the terms of the loan that you were approved for. The better your credit score and financial situation, the better your personal loan terms will be.

At this point, you will be given an opportunity to either accept or reject the personal loan. If the terms seem reasonable for you, you can accept the loan. If they do not, you can reject it. Before accepting or rejecting it, you should shop around and se what other offers you may be eligible for. Just remember, try to get pre-approved and do not apply for too many personal loans within a short period of time as this will hurt your credit score.

Are you Required to Take the Loan You Were Approved For?

Even if you were approved for a personal loan, you are not required to take the loan. This is so because once you've been approved, the lender will present you with the terms of the loan. If for any reason you do not like the terms of the personal loan, you are not required to take the loan, and can simply choose not to agree to it. That said, you should only apply for a loan that you know you'll want to take if approved. Because usually, if you're approved for a loan, this means that the lender has already checked your credit report and placed a hard inquiry on your credit file, slightly lowering your credit score.

Additionally, you should carefully consider applying for a personal loan because many lenders will charge you a non-refundable application fee. So, to avoid paying unnecessary application fees, only apply for a loan that you're reasonably sure you want to take and one that you're likely to be approved for.

Also, you should be aware of loan origination fees. Although most major lenders will not charge you a loan origination fee, some lenders will charge you this fee. A loan origination fee is a fee that's charged by a lender to compensate them for the expenses related to providing you a loan. Typically, lenders that charge this fee will deduct it from your personal loan. So, if the lender you want to borrow from charges this fee and you do not want to pay it, you should look for another lender that does not impose this fee.

Should You Get a Personal Loan?

We will now consider some reasons that would make it good for you to obtain a personal loan vs some reasons why you should not obtain a personal loan.

Paying Down Debt (Pro)

Getting a personal loan to pay down some of your high-interest credit card debt may be a great idea as personal loans tend to have significantly lower interest rates than credit card debt. So, if you qualify for a personal loan, it may be an excellent idea to obtain one to pay down your debts. This is so because personal loans can significantly reduce the amount of money that you owe. Furthermore, using a personal loan to pay down your credit card debt can increase your credit score because it reduces your credit utilization rate, which can boost your credit score.

Unsecured (Pro)

Personal loans are often unsecured, meaning you are not required to deposit any type of collateral with the lender to obtain them, making them fairly easy for the average person to obtain. In the event that you are not capable of repaying the loan, you will not lose any collateral because none was deposited. Although, home equity loans are cheaper than personal loans because they often come with a lower interest rate, if you do not pay a home equity loan, the bank may foreclose on your home as repayment of the unpaid home equity loan.

Quick (Pro)

Obtaining a personal loan is fairly quick, often taking no longer than 7 business days to get a personal loan. So, if you have an emergency and you need quick cash, a personal loan is a great way to get quick access to funds.

Short Repayment Term (Con)

Typically, personal loans come with a fixed and short repayment terms, with most ranging from 1 to 5 years. So, you should keep this in mind as you will be liable for making a fixed payment every month. So, before you apply for a personal loan, keep in mind that you will have to keep enough funds to afford the monthly payment for the term of your loan.

Expensive (Con)

Usually, with a personal loan, you will have to make pre-determined loan payments within a short period of time to pay back the money that you're borrowing. For some people, this may result in a large payment that they are not capable of making on a monthly basis. Although credit cards charge higher interest, you have significant leeway when it comes to paying your down debt so long as you're making the minimum payment on your credit card.

Although personal loans are significantly cheaper than borrowing money on your credit card, some lenders charge a high interest rate. Some personal loans are cheap, coming in at interest rate of 5% to 7%, however, other personal loans are expensive, often exceeding 10%. So, you should consider the amount of interest when choosing to take a personal loan.

Does a Personal Loan Affect Your Credit Score?

Yes, taking out a personal loan will affect your credit score. However, the effect it has on your credit score will depend on a few things. First off, when you apply for a personal loan, your lender will place a hard inquiry on your credit report when they access it to review your eligibility for the loan. That said, a single hard inquiry will only lower your credit score by a few points.

Furthermore, a personal loan increases the amount of debt that you owe, which can lower your credit score, especially if you're not using the funds to pay down other debts, such as credit card debt.

Moreover, since personal loan account status is reported to the credit reporting bureaus, if you do not make your payments on time, late payments will be reported to the credit reporting bureaus, significantly lowering your credit score. However, to avoid this, just make all of your payments on time and this will improve your credit score in the long run.

That said, a personal loan can improve your credit score because it creates a more diverse credit mix, which is a factor that has an effect on your credit score.

Frequently Asked Questions (FAQs)

1. Can I cancel a personal loan after approval?

Yes, in most circumstances, you can cancel your personal loan so long as you did not sign an agreement accepting it and the funds have not been dispersed to you. If you signed the agreement and the funds have been dispersed to you, you should immediately contact your lender and ask them about your options for cancelling the personal loan.

2. Is it worth it to take out a personal loan?

In some circumstances, it may be worth it for some individuals to take out a personal loan. The answer to this question depends on your specific circumstances. We discussed the advantages and disadvantages of taking out a personal loan in the sections above.

3. Can I use a personal loan for anything?

Once personal loan funds have been dispersed to you, you can use them as you see fit unless otherwise restricted by your lender.

4. How soon do you have to start paying back personal loans?

Typically, you will need to begin paying back personal loans within 30 days. That said, you should check the terms of your agreement and look for any communications from your lender as to when your payments are due.