How do personal loans affect credit?

Applying for a personal loan can cause a five-point drop in credit scores for most people. This is because, when you are ready to apply for the loan, the lender performs a more detailed credit check, known as “strong credit extraction.” This is actually recorded on your credit report as a credit inquiry, and because buying loans is a somewhat risky activity, your credit score generally drops a few points accordingly. Taking out a personal loan could hurt your credit score by adding it to the amount owed category of your FICO calculation. Also, if you use a personal loan to pay off credit card debt but start charging on your credit cards again, you'll accumulate more debt.

When you apply for a personal loan, you add the debt to the total amounts owed. This is likely to lower your credit rating in the short term. A higher debt burden is associated with a higher risk of taking on more than you can handle, meaning that lenders may consider you a greater risk. Read on to find out how a personal loan could affect your credit score and if it's the right choice for you.

But if you're already living on a tight budget, taking out a personal loan to finance a trip to Fiji could cause you problems. If you do, you will return to where you started, but with more debt in the form of a personal loan. Having cash on hand to handle a financial emergency can be a lifesaver, but a personal loan can affect your credit score both well and badly. To find out what impact your personal loan is having on your credit score, you can review your credit report regularly.

Still, it's helpful to know the different ways that personal loans affect your credit score so you don't be surprised if your score is going in a different direction than you intended. For example, you can apply for a personal loan to start a new business, pay your medical bills, or finance an expensive but urgent repair of your home (such as a new roof in the middle of the rainy season). Before you apply, just keep in mind that taking a personal loan with bad credit means you can pay higher interest rates and some fees. Another way that a personal loan could damage your credit, at least temporarily, is when you finish paying it.

To understand how getting a personal loan affects your credit rating, you need to know how the rating is calculated. However, the habits that led you to go into debt in the first place may make a personal loan feel more like an additional financial burden. On the other hand, the lower your credit score, the less likely you are to be considered creditworthy and approved for a low-interest personal loan. If you have problems with high-interest credit card debt or need cash for an unexpected expense or a large purchase, you may be considering applying for a personal loan.

A personal loan does not take into account the use of your credit because it is a form of installment credit, not revolving credit. A personal loan can be an affordable way to finance a large expense, cover an emergency, or even consolidate a debt. Qualified customers using Rocket Loans will see 36- or 60-month term loan options, and the APR ranges from a low of 5.970% (discounted auto-payment rate) to a maximum of 29.99% (non-discounted auto-payment rate) depending on their credit profile.

Tonia Baldy
Tonia Baldy

Passionate entrepreneur. Freelance pop culture enthusiast. Award-winning pop culture advocate. Music expert. Friendly beer fan.