Can You Use a Personal Loan To Buy a House?

If you want to buy a house, you may be wondering whether it's possible to take out a personal loan and use the funds as a down payment to buy a house? We will provide you with everything you need to know about using personal loans to buy a home.

Can You Use a Personal Loan To Buy a House?

Although it may be possible to buy a home using a personal loan as a down payment, many mortgage lenders do not allow personal loan funds to be used as a down payment for a home. This is so because using a personal loan as a down payment raises red flags for lenders as to your ability to afford the home you're seeking to buy.

Don't plan on hiding the source of funding for your down payment as you are required to disclose the source of your down payment by providing bank statements that show the source of your money.

Using a personal loan as a downpayment should be a last resort option and should only be used if you're confident that you can pay back the personal loan in a short period of time.

Before using a personal loan as a downpayment to buy a house, you should consider your ability to make payments on the personal loan as well as the payment on your home mortgage. Personal loans are typically expensive and must be paid off within a short period of time, such as two or five years vs the thirty years you have to pay off a home loan.

Since personal loans must be paid off in a shorter period of time, they typically require higher monthly payments than mortgages where payments are significantly lower since they're spread across a lengthier time period.

Additionally, personal loans charge a high interest rate since there is nothing securing the loan. So, lenders charge more interest since they're taking a bigger risk by lending you the money, making them a bad option to use to buy a home.

How To Get a Personal Loan To Buy a Home?

While some lenders will not allow you to use personal loan funds to buy a home, and we discourage their use to buy a house, if you are dead set on using a personal loan as a downpayment to buy a home, you can shop around for personal loans. There are a ton of reputable lenders that offer you the ability to take out a personal loan.

Shop around for the best loan terms and interest rates as they vary greatly among the available personal loan lenders. Most major banks provide personal loans, with credit unions and online lenders often offering the best and most competitive interest rates on such loans.

You should look for a lender that charges the lowest interest rates in order to get the lowest monthly payments to make paying off your personal loan and mortgage as manageable as possible.

Before even applying for a personal loan, you should consider whether your income is enough to make payments on your existing debts, your personal loan, and your mortgage.

If you can afford to comfortably make all of your payments on time, then it makes sense to proceed. However, if your income is insufficient to do so, you should consider holding off on buying your home.

Consider Alternatives To Using a Personal Loan To Buy a Home

If you're considering taking out a personal loan to buy a home, here are some alternatives that you should consider before applying for a personal loan.

Alternative #1: Use an FHA Loan

If you don't have enough funds for a 20% downpayment on a home, you should consider an FHA Loan. With an FHA home loan, you're only required to make a downpayment of only 3.5% so long as you have a credit score of 580 or higher. So, this could be a great alternative to taking out a personal loan to buy a house. That said, you should keep in mind that if your downpayment is less than 10% of the home's price, you will be required to buy mortgage insurance, protecting the lender in the event that you default on the loan. That said, if you're interested in an FHA loan, you should check the entire list of requirements for qualifying for such a home loan.

Alternative #2: Consider a VA Loan

If you're a veteran and you're looking for options to buy a home, you should consider taking out a VA loan. VA loans are available to veterans, those on active duty, or an eligible surviving spouse of a veteran. These loans are very affordable, require little in terms of downpayment, and do not require mortgage insurance as do FHA Loans. So, consider them if you meet the requirements for them.

Alternative #3: Consider an Alternative Lender

If you want to take out a mortgage to buy a home and are having difficulty securing sufficient funds for a down payment, you should consider seeking alternative lenders that require a low or no downpayment. There are many banks out there that offer zero or low downpayments for mortgages. Some of these lenders include Bank of America, Quicken Loans, SoFi, Suntrust, and PNC Mortgage. That said, even though you might qualify for a low downpayment mortgage, you should keep in mind that such options will be more expensive since you're putting little money towards buying a home. So, make sure you have the funds necessary to comfortably afford your monthly payment.

Alternative #4: Take a Loan From Family or Close Friends

If you want money for a downpayment on a new home, you should consider asking family or close friends for money for a downpayment instead of taking out a personal loan. Ask someone close like your dad, mom, brother, sister, or close friend for money. It may be tricky asking them for money, but it beats using a personal loan. When you take money from family or friends, paying off the loan is easier than sticking to a strict monthly schedule that comes with personal loans. You have more freedom paying it off.

Alternative #5: Consider a Downpayment Assistance Program

Downpayment assistance programs are a great alternative to using personal loans to buy a home. DPAs provide homebuyers with grants or low-interest loans to assist them with buying a home. The United States has over 2000 programs to help homebuyers afford to buy a home. Search for a down payment assistance program in your State and you will be surprised with the options that may be available to you.

Alternative #6: Save Up Money

If you are in no rush to buy a home, it may be worth it to keep working and save up some money to buy a home. If you are married, it could be worth it to ask your significant other to work and help you save money to buy a home. Also, if you have a lot of stuff lying around, try selling it to save some money for a home. If you have any skills, you should consider freelancing to earn some extra income to buy a home. The internet is full of opportunities for you to earn some extra money to save for the downpayment for a home.

Does Taking Out a Personal Loan To Buy a Home Affect Your Credit?

Before taking out a personal loan to buy a house, you should consider the impact that it has on your credit. If you want to buy a home, you should do everything possible to maintain the best credit score for when you apply for a mortgage. This is so because your credit score impacts whether you'll be approved for a loan, the terms of the loan, and the interest rate on the loan.

Taking out a personal loan does affect your credit. First, when you apply for a personal loan, a hard inquiry is placed on your credit report, slightly lowering your credit score. Although a single hard inquiry does not have a significant impact on your credit score, if you submit too many personal loan applications, you could cause a significant drop in your credit score due to the hard inquiries that will be placed on your credit report.

Second, when taking out a personal loan, you should ensure that you're able to make the monthly payments on the loan because missing even a single payment on your personal loan may result in a late payment notation added to your credit report. Having a late payment on your credit report could make it very difficult to be approved for a home loan.

So, these are some things to consider before applying for a personal loan to use as a down payment for a home.

Why Using a Personal Loan as a Downpayment For a Home May Be a Bad Idea

Here are some of the disadvantages of using a personal loan as a downpayment for a new home:

Disadvantage #1: Limits Your Loan Options

The first disadvantage of taking out a personal loan to use as a downpayment for a home is that it limits your loan options as some lenders will not allow you to use personal loan funds as a downpayment. Lenders will ask you about the source of the money and lying on the application could get you denied.

Disadvantage #2: There Are Other Options

The second disadvantage is that there are less expensive alternatives available to you instead of taking out a high interest rate personal loan to use as a downpayment. Most people will tell you that you need at least a 20% downpayment to buy a home, but the reality is that you may be able to buy a home with as little as a 3% downpayment.

Disadvantage #3: Lower Credit Score

Taking out a personal loan right before you buy a home can be a bad idea as it may lower your credit score because of the hard inquiry that's placed on your credit report. Also, missing a payment on a personal loan could cause significant damage to your credit. This is something that you want to avoid right before you apply for a home mortgage.

Disadvantage #4: It Makes Buying a Home Expensive

Personal loans must be repaid within a very short period of time, such as 1, 2, 3, or 5 years. So, your payments will be very high, especially if you include the amount of money that you need to pay for your mortgage. You should only use a personal loan as a last resort, and if you're sure that you can handle the mortgage and personal loan payment.

The Bottom Line

Although some lenders may allow you to use a personal loan as a downpayment to buy a house, you should avoid using them because they are expensive and some lenders will not be willing to work with you. If you have any general questions or comments, please feel free to leave them in the comments section below.


Will Paying Off a Personal Loan Early Hurt Your Credit Score?

If you've taken out a personal loan and you have some extra cash, you might be wondering, does paying off a personal loan early hurt your credit score? We will answer this question in much detail below.

Will Paying Off a Personal Loan Early Hurt Your Credit Score?

Oftentimes paying off a personal loan early can either have no impact on your credit score or can hurt your credit score because it can potentially reduce your credit mix, which refers to the diversity of the active accounts on your credit report. This is especially true if the loan you're paying off is your only personal loan. Your credit mix accounts for 10% of your credit score, the more diverse the type of active accounts on your credit report, the higher your credit score will be.

That said, the drop caused by paying off a personal loan early is temporary and if there is nothing negative on your credit report, your credit score should rebound within just a few months of paying off your personal loan.

Paying off a personal loan early will not remove it from your credit report. Paid off personal loans where you haven't missed any payments, remain on your credit report for 10 years from the date you paid off the loan. After the 10 year period, the loan is automatically removed from your credit report.

However, if you've paid off a personal loan where you've made late payments on the account that were reported on your credit report, such loans will remain on your credit report for 7 years from the date you missed your first payment on the loan. After the 7 year period, the loan will be automatically removed from your credit report.

Why does paying off a personal loan hurt your credit score?

Paying off a personal loan early can lower your credit score because your paid-off account will show up as closed on your credit report, reducing your credit mix. Having a diverse credit mix accounts for 10% of your credit score, so closing the account may lower your credit score, especially if it's your only personal loan or installment account.

Also, paying off a personal loan may hurt your credit score because open accounts that you're actively making payments on show lenders how you're managing your credit right now, whereas paid-off accounts only show lenders how you've handled debt repayment in the past.

So, if you want to improve your credit score, you should keep your personal open and avoid paying it off early. Continuing to make payments on your personal loan can be better for your credit score than paying off the loan early.

Keeping your personal loan open for longer can improve a thin credit file. A thin credit file is one that does not contain sufficient credit information. Paying off a personal loan for longer can help you remedy a thin credit file. So, even if you have the funds to pay off your loan early, it could be beneficial to keep the loan open for longer to establish good credit history.

Additionally, keeping a personal loan open for longer improves your credit mix. Your credit mix refers to the diversity of the accounts that are currently open, such as credit cards and installment accounts. Personal loans are a type of installment account that can improve your credit mix and raise your credit score.

Should You Pay Off Your Personal Loan Early?

When deciding whether to pay off your personal loan, there are a couple of things that you should consider, here are some of those things:

1. Interest On Your Personal Loan

If the interest rate on your personal loan is very high, it may make sense for you to pay off the loan early in order to avoid paying interest on the outstanding amount that's due. However, before you go ahead and pay off your personal loan, you should first check with your lender to see if they charge a pre-payment penalty. A pre-payment penalty is a penalty fee that lenders charge to those who pay off their loans early. Also, if you have a precomputed interest loan, this means that the total interest was calculated and fixed at the beginning of the loan. So, if you were to pay off the loan early, you would already be paying the interest on the loan. If you have a precomputed interest loan, you will not save any money on interest as you would be paying it by paying off the loan. So, consider these things before rushing to pay off your personal loan early.

2. Lowering Your DTI (Debt to Income Ratio)

If you're applying for a home loan or financing a vehicle, your lender may require you to lower your debt to income ratio, meaning you must pay down some of your debts to be approved for credit. Most lenders require your debt to income ratio to be below 43%, and ideally, your DTI should be 31% or less. Paying off a personal loan can be a way to reduce your debt to income ratio, making it more likely that you'll be approved for a home loan or other types of credit. So, if you're going to purchase a home and need financing in the near future, you should consider paying off your personal loan to lower your DTI in order to be approved.

3. Other Types of Debt

If you have a lot of open credit cards and other loans with debt, it may make sense for you to pay off your personal loan in order to tackle paying off your other debts. This is especially true if you have other personal loans, credit cards, student loans, and auto loans. Even if paying off your personal loan causes a small drop in your credit score, don't worry too much about it as the drop is likely temporary. In fact, your credit score will likely improve within a short period of time.

When Should You Avoid Paying Off a Personal Loan Early?

Here are some situations in which you should avoid paying off a personal loan early:

1. Interest On Your Personal Loan is Very Low

If you've taken out a personal loan and the interest rate on your personal loan is very low, paying it off may not be worth parting with your cash. For example, if you have a personal loan at a 5.0% interest rate, and you have credit card debt at 15%, it will make more sense for you to pay off your credit card debt before tackling your personal loan debt because you will be paying significantly more on the debt you've accumulated on your credit cards.

2. Keep Your Cash On Hand

Experts have come to a consensus that every person should have three to six months' worth of expenses saved up for an emergency. So, if you have extra cash burning a hole in your pocket, you should save it up and only make the monthly payment on your personal loan until you've saved up at least three to six months' worth of expenses. Once you've established an emergency fund, it makes sense to contribute more money to pay off your personal loan debt.

3. Your Personal Loan is Substantially Paid Off

If your personal loan is substantially paid off an you only have a few payments remaining, it doesn't make sense to pay it off early because you will not save much on interest by paying it off early. In this case, it makes sense to continue making payments on the loan in order to improve your credit via timely monthly payments. It will only make sense to pay off your loan early if you need to lower your DTI quickly in order to qualify for a large purchase such as borrowing money to buy a home or finance a vehicle.

Conclusion: Should you pay off your personal loan early?

If you have extra cash on hand and you don't mind your credit score temporarily drop some points, you should go ahead and pay off your personal loan. However, if you're planning on making a large purchase, such as a home, in the near future and your debt to income ratio is within a good range, you should hold off on paying off your personal loan to maintain the best credit score possible while qualify for a mortgage.

Also, it may make sense to pay off a personal loan if you don't have credit card debt that you're paying a high interest rate on. If you do have credit card debt, you're better off paying down your cards because the interest rate on credit cards is typically much higher than that of personal loans.

So, ultimately it's up to you, but now you have the knowledge necessary to weigh the pros and cons of paying off your personal loan early.

Frequently Asked Questions (FAQs)

1. Why does my credit score drop when I pay off a loan?

When you pay off a loan, including a personal loan, you're essentially closing down an installment account. Closing an installment account can lower your credit score because it may reduce your credit mix (diversity of accounts on your credit report). Your credit mix accounts for 10% of your credit score, and may be reduced when you pay off a personal loan.

2. Will my credit score increase if I pay off a personal loan?

It is unlikely that paying off a personal loan will increase your credit score. In fact, your credit score will either stay the same or drop a few points when you pay off a personal loan. Your credit score may temporarily drop because you're closing an installment account which can reduce the diversity of your accounts.

3. Should I pay off my personal loan early?

If your personal loan is your only loan, you should hold off on paying it early as it can reduce your credit mix and result in a lower credit score. Also, you should pay off other higher interest rate debt before paying off a personal loan. It really all depends on your situation. This blog post discusses the pros and cons of paying off a personal loan early, weigh them and make your decision.

4. Can paying off a personal loan hurt my credit?

Yes, paying off a personal loan can result in a slightly lower credit score. That said, a drop in your credit score is likely to be temporary and so long as nothing negative on your credit report appears, it should rebound within just a few short months.

5. What debt should I pay off first?

You should pay off your highest interest rate debt first.


Can a Secured Loan Help You Build Credit?

If you were thinking about taking out a secured loan, you may be wondering whether a secured loan can you build credit? We will answer this question in much detail below.

Can a Secured Loan Help You Build Credit?

Yes, a secured loan can help you build credit so long as you make all of your payments in full and on time. Secured loans can help you build credit because your account status is reported to the three major credit reporting bureaus, so any payments you make should help your credit score. Your payment history accounts for 35% of your credit score, so making payments on any type of loan helps improve your credit score. However, missing even a single payment on your secured loan can cause significant damage to your credit score. So, make sure to make all of your payments on time for the best impact on your credit score.

Having said that, you should approach secured loans with caution because if you fail to repay your secured loan, your lender may seize the asset securing the loan. So, if you fail to repay, not only will you cause significant damage to your credit, but you will also lose the asset you placed as collateral for the loan. For example, if you used your car as collateral, if you fail to repay, you will lose your vehicle.

For these reasons, you should only take out a secured loan if you really need the money, and if you can repay the loan as originally agreed between you and your lender to avoid losing your collateral and causing damage to your credit.

What is a Secured Loan?

A secured loan is a loan where a person places collateral, such as cash, stocks, personal property, real property, or any other type of collateral in exchange for borrowing money. If the borrower fails to repay the loan on time as originally agreed, the lender has the right to take the collateral to recoup its losses. Lenders are more likely to make secured loans because they take less of a risk when doing so because if you fail to pay, they can take your collateral and sell it to recoup their money. They do not have to take you to court and sue you to recover their money.

Secured loans are great for someone who has bad credit or has not yet built his or her credit because they are easier to obtain than unsecured, regular personal loans. Unsecured regular personal loans require good credit because the lender is lending you the money based on your creditworthiness and there is nothing securing the loan, so the lender is taking a bigger risk by not requiring collateral.

Should You Take Out a Secured Loan?

You should only take out a secured personal loan if you know you can afford to make the monthly payments on the loan on time. This is so because missing even a single payment on the loan can cause significant damage to your credit. Even worse, if you default on the loan, you will lose the collateral you've placed to secure the loan.

So if you believe that there is a chance that you'll fall behind on your loan payments, you should avoid taking out a secured loan to keep your property and avoid damage to your credit.

However, if you have the ability to make all of the loan payments on time, you can definitely used a secured loan to improve your credit. This is so because the status of your secured personal loan is likely to be reported to the credit bureaus. Making payments on loans will help you build your credit.

In fact, your payment history accounts for 35% of your credit score. So, having a loan account where you've made all your payments on time can significantly help you improve your credit score.

Having said that, secured loans are not for everyone. If you've defaulted on past debt obligations, you should approach them with extreme caution. This is so because if you default on a secured loan, you will lose your collateral and cause significant damage to your credit.

Options Other Than Secured Loans That Can Help You Build Credit

Here are some options other than secured loans that can help you build credit:

  1. Regular Credit Card - If you want to build credit or improve your credit, you should consider applying for a credit card that you have a reasonable chance of being approved for. Oftentimes, card issuers provide you with the minimum credit score required for approval, so choose a card that's suitable for your credit score and apply for it. If you're approved great, you can use your new credit card to build your credit. Making payments and keeping a low balance on your new credit card will help you build your credit very quickly. Just make sure to make all of your payments on time, missing a single payment can cause significant damage to your credit.
  2. Secured Credit Card - If you applied for a regular credit card, but were denied, you should consider applying for a secured credit card. Secured cards work the same way as do regular credit cards and they can be a great tool for building credit from scratch or rebuilding your credit. The only major difference between a secured credit card and a regular unsecured credit card is that you will have to place a security deposit with the card issuer to obtain a secured card. The security deposit determines your credit limit. For example, if you place a $500 security deposit, you will be issued a credit card with a $500 credit limit.
  3. Become an Authorized User - A third option for improving your credit without taking out a secured loan is to find someone, such as a close relative who has good credit, and asking them to add you onto their credit card as an authorized user. Adding yourself as an authorized user allows you to obtain the good credit history behind the credit card. For example, if your brother or sister adds you as an authorized user to their credit card, the entire credit history behind that credit card will appear on your credit report as if you had the account, boosting your credit score. That said, some people may be unwilling to add you as an authorized user because only the primary account holder is responsible for making payments on the account. You, as an authorized user, are not liable for making payments on the account.
  4. Take Out a Personal Loan - A fourth option to improve your credit is to take out a regular unsecured personal loan. Personal loans are a great option for someone who has good credit. If you don't have good credit, you should consider asking a close friend or relative to cosign the loan with you. If they have good credit, your chances of being approved are very good. That said, you should know that if someone cosigns a personal loan with you, both of you are liable for repaying the money borrowed. If you miss payments or default on the personal loan, you will cause significant damage to your credit and your cosigner's credit, so make sure to only take out a personal loan if you can afford to pay it off.
  5. Financing a Car - A fifth option that you have is to finance a vehicle. Now you shouldn't go out and buy a new car just to build your credit, but if you do need a car, you should consider financing it instead of paying it off. Financing a vehicle involves taking out an installment loan to pay it off. The payments you make on a car loan will boost your credit so long as you make your payments on time. Missing even a single payment can cause significant damage to your credit. So, make sure to make all of your payments on time.

Secured vs Unsecured Loans - What is the difference between secured and unsecured loans?

At this point, you might be wondering what is the difference between a secured loan and an unsecured loan. The major difference between the two types of loans is that with a secured loan, you are placing a security deposit in the form of cash, personal property, or real property to secure the loan. If you default on the secured loan, your lender can take your property and sell it to recoup the money it allowed you to borrow.

With a regular unsecured personal loan, you are borrowing money based on your creditworthiness. The risk for lenders is larger with regular unsecured personal loans because if you default, the lender is left with nothing since there is no collateral that can be sold to recoup their money.

That said, sine unsecured loans are riskier for lenders, they typically come with higher interest rates. The higher interest rates are meant to compensate lenders for taking a risk by lending you money.

Nevertheless, if you default on an unsecured loan, you will not lose your property because there is nothing securing the loan. However, defaulting will cause significant damage to your credit when late payments are reported to the credit bureaus. If the debt is sold to a collection agency, a collection agency may cause additional damage by adding a collection account to your credit report.

Frequently Asked Questions (FAQs)

1. Will a secured loan build credit?

A secured loan, if used properly, can help you build credit. However, for a secured loan to help you build credit, you must make all of your monthly payments on time. Missing even a single payment on a secured loan can cause a missed payment mark to be added to your credit report. A missed payment mark can significantly reduce your credit score. So, make sure to make your payments on time and a secured loan will help you build credit.

2. Are secured loans worth it?

Secured loans can be used as an effective tool to borrow money and build credit. However, you must use them responsibly and make monthly payments on time for them to build your credit.

3. Is it bad to get a secured loan?

It's only bad to get a secured loan if you believe that you're going to default on repaying it. Secured loans can be an effective tool to build your credit. However, if you take out a secured loan and miss payments on the loan, you will cause significant damage to your credit. Additionally, if you default on your secured loan, you will lose your collateral (the money or property securing the loan).

4. What are the main advantages of a secured loan?

The main advantages of secured loans is that they're easier to get than regular non-secured loans since lenders have collateral they can take if you default. Also, they can be used as a great tool to build credit. Additionally, they often come with a lower interest rate than regular loans since the lender is taking less of a risk since there is collateral involved.

5. Do secured loans hurt your credit?

Secured loans do not hurt your credit. They can hurt your credit if you miss payments on them or default on making your monthly payment.


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.