Applying for a personal loan can hurt your credit score, but the effect of a single application is usually small.
The important distinction is between shopping for a loan and formally applying for one. Some lenders let you check potential rates or eligibility with a soft credit inquiry, which does not affect your credit score. A formal application, on the other hand, commonly requires a hard credit inquiry, which can.
That does not mean you should avoid applying for credit whenever you need it. It means you should understand what lenders are checking, limit unnecessary applications, and compare your options before committing to a loan.
Why Does Applying for a Personal Loan Affect Your Credit?
Lenders commonly review your credit when you formally apply for a personal loan. Your credit history gives them information they can use when evaluating your application.
A credit check generally falls into one of two categories: a soft inquiry or a hard inquiry.
A soft credit inquiry can occur when you check your own credit or when your credit file is reviewed for certain purposes unrelated to a new credit application. Soft inquiries do not affect your credit score.
A hard credit inquiry typically occurs when you apply for new credit and a lender reviews your credit report as part of its decision. The Consumer Financial Protection Bureau (CFPB) notes that hard inquiries can affect credit scores because scoring models consider how recently and frequently you have applied for credit.
That does not make one application a credit catastrophe. In fact, the CFPB says a single lender inquiry should have little impact on your score. The effect can become more important when several applications pile up within a short period.
How Much Does a Personal Loan Application Lower Your Credit Score?
There is no universal number.
The effect of a hard inquiry depends on your overall credit profile and the scoring model being used. Someone with a long credit history and few recent applications may see a different result than someone with a shorter history or several recent inquiries.
According to FICO, one additional credit inquiry generally lowers a FICO Score by fewer than five points for most people. The effect can be greater for consumers with relatively few accounts or a short credit history.
Hard inquiries can remain on a credit report for up to two years, although FICO says its scores only consider inquiries from the previous 12 months.
Your score can also move for plenty of reasons unrelated to an inquiry. Account balances change. Payments get reported. Accounts get older. New accounts appear on your reports. If your score changes after you take out a personal loan, the hard inquiry may be only one part of the explanation.
Can You Check Personal Loan Rates Without Hurting Your Credit?
In some cases, yes.
Some lenders allow prospective borrowers to check potential rates or eligibility before submitting a formal application. When that process uses a soft inquiry, checking your options does not affect your credit score.
This can be useful when comparing personal loans. Instead of formally applying with several lenders immediately, you may be able to compare potential annual percentage rates (APRs), loan amounts, fees, and repayment terms first.
Read the lender’s terms before submitting your information. You want to know whether the initial credit check is soft or hard and at what point a hard inquiry may occur.
An initial rate or eligibility check also does not mean the terms shown are final. A lender may need to verify your credit, income, debts, or other information before making a final lending decision.
For more information on borrowing options and how personal loans work, visit the Personal Loans.
Does Taking Out a Personal Loan Affect Your Credit Too?
It can.
If you accept a personal loan, the new account may be reported to the credit bureaus. That can affect several pieces of your credit profile beyond the original hard inquiry.
The longer-term effect depends heavily on how you manage the debt.
Making payments on time can add positive payment history to your credit reports. Missing payments can have the opposite effect. The CFPB notes that payment history is included on consumer credit reports, along with information about the amount of credit a consumer has and uses.
A personal loan also adds installment debt to your financial picture. That is why taking out a loan solely in hopes of increasing a credit score usually deserves more scrutiny than simply asking whether another account might help your credit mix.
The loan comes with an interest rate, a required payment, and potentially fees. Those costs are real regardless of what eventually happens to your score.
What If You Use a Personal Loan to Consolidate Debt?
Debt consolidation makes the credit-score picture more complicated because several things may happen around the same time.
First, you apply for a new personal loan, which may result in a hard inquiry. The new loan can then appear on your credit reports. If you use the proceeds to pay down credit card balances, however, your revolving balances may also fall.
Moving debt from credit cards into a personal loan does not erase the debt. It changes its structure.
For example, suppose you have $10,000 spread across several credit cards and borrow $10,000 through a personal loan to pay them off. You still owe $10,000, but you have exchanged revolving credit card balances for an installment loan with a defined repayment schedule.
Whether that makes financial sense depends on factors such as the new loan’s APR, fees, repayment term, monthly payment, and total borrowing cost.
There is another obvious danger: paying off your credit cards with a loan and then running the card balances back up. That can leave you with the personal loan and another round of revolving debt.
Do Multiple Personal Loan Applications Count as One Inquiry?
Do not assume they will.
Credit-scoring models may group certain inquiries when consumers are rate shopping for the same type of loan within a limited period. However, the specific treatment depends on the scoring model and type of credit involved.
The CFPB notes that commonly used scoring models provide rate-shopping treatment for certain student loan, auto loan, and mortgage inquiries made within a limited window. FICO similarly describes its rate-shopping rules around mortgage, auto, and student loans.
Personal loans are not included in those standard examples.
For that reason, it is safer not to assume that submitting several formal personal loan applications will be treated as a single inquiry. When possible, compare potential terms through processes that use soft inquiries before deciding where to formally apply.
Can You Be Turned Down After a Hard Credit Check?
Yes.
A hard inquiry means you applied for credit. It does not determine the outcome of the application.
Lenders may consider your credit history, income, existing debts, debt-to-income ratio (DTI), requested loan amount, and other underwriting criteria. Requirements can vary significantly from one lender to another.
That is another reason to review eligibility requirements before formally applying. If your financial profile clearly falls outside a lender’s stated criteria, submitting an application anyway may add a hard inquiry without getting you any closer to the loan you need.
Your employment and income situation can matter as well. If that is a concern, read getting a personal loan while unemployed for more on the factors lenders may consider.
How to Shop for a Personal Loan With Less Credit Impact
Start by reviewing your own credit reports. Checking your own credit report does not hurt your credit score, according to the CFPB.
Knowing what is on your reports can also help you spot errors before a lender reviews the same information.
Next, look for lenders that let you check potential rates or eligibility with a soft inquiry. Compare the economics of each loan rather than focusing only on the advertised rate or monthly payment.
Consider:
- Annual percentage rate (APR)
- Origination and other lender fees
- Loan amount
- Monthly payment
- Repayment term
- Total repayment cost
- Eligibility requirements
- Any applicable prepayment penalties
A longer repayment term, for example, may reduce your monthly payment while increasing the total interest paid over the life of the loan.
Once you have narrowed down your options, you can decide whether submitting a formal application makes sense.
Frequently Asked Questions
How Long Does a Hard Inquiry Stay on Your Credit Report?
A hard inquiry can remain on your credit report for up to two years. FICO says its scoring models only consider hard inquiries from the previous 12 months when calculating FICO Scores.
Does Checking Your Own Credit Hurt Your Credit Score?
No. Checking your own credit report does not affect your credit score. The CFPB recommends periodically reviewing your credit reports for inaccurate or incomplete information.
How Many Points Does a Personal Loan Application Lower Your Credit Score?
There is no fixed amount. FICO says one additional credit inquiry generally lowers FICO Scores by fewer than five points for most consumers, although the impact can be greater for people with short credit histories or relatively few accounts.
Is a Soft Inquiry Visible to Lenders?
The CFPB explains that certain inquiries, such as those related to checking your own credit, do not affect your credit score.
The Bottom Line
Applying for a personal loan can temporarily affect your credit score when the lender performs a hard inquiry. A single inquiry generally has a relatively small impact, while repeated applications can create more pressure on your credit profile.
The easiest way to limit unnecessary inquiries is to do the homework first. Review your credit, compare lenders that let you check potential terms using a soft inquiry, examine the APR and fees, and save the formal application for a loan that actually fits your needs.
The inquiry itself is only one part of the decision. The interest rate, fees, monthly payment, and your ability to repay the debt will matter long after a few points of short-term credit-score movement.
