How Personal Loans Can Impact Your Credit Score


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When it comes to paying for some of life’s most important expenses – a home improvement, a big medical bill, an emergency, a wedding, or even a funeral – many people find themselves strapped for cash to cover these. costs immediately.

A personal loan is a form of credit that can come in handy in these cases. And according to a 2019 Experian study, personal loans are the fastest growing form of debt in the United States. life, including their credit rating.

So, does taking out a personal loan have a positive or negative impact on your credit score? Really, it depends.

Why use a personal loan in the first place

Personal loans generally allow you to borrow money at a much lower interest rate than if you were to put the expenses on a credit card. According to the Federal Reserve, the current average APR for a two-year personal loan is 9.58%. In contrast, the average interest rate on a credit card is 16.30%, but can reach 24%. So, a personal loan can be a profitable way to cover a big expense or consolidate a debt.

How a personal loan can help your credit score

Taking out a personal loan can help you improve your credit mix. Your credit mix refers to the different types of credit accounts you have including credit cards, loans, mortgages, etc., and is 10% of your credit score.

While you don’t need to have each type of account, having a variety of accounts can show lenders that you have the ability to handle multiple types of credit. This can help, as financial institutions are more likely to view you as a more creditworthy borrower when applying for a new form of credit, such as a mortgage or car loan. (Just make sure you don’t get into too much debt.)

Personal loans can also help you build a history of on-time payments. Payment history is the most important factor in calculating your credit score – it accounts for 35%. Making your monthly payments on time and in full can provide clues to a lender that you are very likely to continue repaying the money you owe if you apply for another line of credit in the future.

This is especially important when you are just starting to build or improve your credit. In fact, while a low credit score is usually a barrier to approval for most loans, some lenders actually offer personal loans for people with average or bad credit.

Upstart, for example, accepts applicants with a credit score of 600 or less and even those with such poor credit history that they don’t even have a credit score.

OneMain Financial personal loans also offer an option for those with average or poor credit. Before you apply, just keep in mind that taking out a personal loan with bad credit means you could be paying higher interest rates and some fees.

Pushy personal loans

  • Annual percentage rate (APR)

  • Purpose of the loan

    Debt consolidation, credit card refinancing, marriage, moving or medical

  • Loan amounts

  • terms

  • Credit needed

    FICO or Vantage score of 600 (but will accept applicants with such poor credit history that they do not have a credit score)

  • Original fees

    0% to 8% of the target amount

  • Prepayment penalty

  • Late charge

    Greater of 5% of the monthly overdue amount or $ 15

OneMain personal financial loans

  • Annual percentage rate (APR)

  • Purpose of the loan

    Debt consolidation, large expenses, emergency costs

  • Loan amounts

  • terms

  • Credit needed

  • Original fees

    Fixed fees from $ 25 to $ 1 00 or percentage ranging from 1% to 10% (depending on your state)

  • Prepayment penalty

  • Late charge

    Up to $ 30 per late payment or up to 15% (depending on your state)

How a personal loan can hurt your credit score

Of course, as with any form of credit, irresponsible use of a personal loan can have a negative impact on your credit score. And just like any other loan, mortgage, or credit card application, applying for a personal loan can cause your credit score to drop slightly. This is because lenders will do a thorough investigation of your credit, and every time a thorough investigation is done, it shows up on your credit report and your score goes down a bit.

Therefore, you may want to be strategic when deciding to apply for a personal loan. Applying for a personal loan soon after applying for a new credit card could lead to an even greater drop in your credit score, as both applications would be thoroughly investigated.

Many lenders offer an online tool that you can use to determine the interest rate you are likely to be entitled to based on your information. Getting an estimate won’t hurt your score, and you can be sure you’re getting the best interest rate before you submit your application.

Select also has a widget that you can use to compare personal loan offers without impacting your credit score. This comparison tool provided by Even Financial will help you find a personal loan that’s right for you. You will be asked 16 questions, including your annual income, date of birth, and Social Security number so Even Financial can determine your best deals. The service is free, secure and does not affect your credit score.

Editorial note: The tool is provided and powered by Even Financial, a search and comparison engine that connects you with third party lenders. Any information you provide is transmitted directly to Even Financial. Select does not have access to any of the data you provide. Select can receive an affiliate commission on partner offers in the Even Financial tool. The commission does not influence the selection in the order of the offers.

Another thing to keep in mind is that personal loans can be very useful tools for debt consolidation and debt repayment. However, the habits that got you into debt in the first place can make a personal loan look more like an added financial burden.

For example, if you take out a personal loan to pay off a maximum credit card, but then you will maximize the credit card again immediately after, you’ll be stuck with more credit card debt and a personal loan to repay.

This cycle of debt can also negatively impact your credit score if the burden of additional payments is so high that you start to miss monthly payments or not make payments in full and hurt your rate. use of credit.

Always make sure you have a plan to pay off any additional debt you incur before you even submit your application. And getting to the root of all not-so-healthy financial habits can ensure that you actually fix the problem instead of just dealing with a symptom of the problem.

At the end of the line

A personal loan can be an affordable way to finance a large expense, cover an emergency, or even consolidate debt. But just like with any other form of credit, its impact on your credit score can depend on how it’s used.

A slight drop in your score after applying is usually to be expected, as a lender will conduct a thorough investigation of your credit. But using a personal loan to diversify your credit mix and make payments on your balance on time can have a positive impact on your score.

Just be aware of all the unhealthy financial habits that could easily turn a personal loan from a resource into a burden.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.


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