A personal loan will lower your credit score when you first take it out, then help it recover if you make on-time payments
Taking out a personal loan creates two when ready hits to your credit score. First, the lender runs a hard inquiry — a formal check of your credit report — which typically drops your score by a few points for a few months. Second, the new loan itself appears on your report as a new account, which also lowers your score because you now have less available credit relative to what you owe. These drops are temporary. Over the next 6 to 12 months, your score usually recovers and then climbs higher than before, as long as you make every payment on time.
The long-term effect depends entirely on your payment behaviour. A personal loan that you pay as agreed becomes a positive entry on your credit history — it shows lenders you can handle debt responsibly. But if you miss payments or default, the loan will damage your score for years. The loan also affects your credit mix, which is part of how your score is calculated. Having different types of debt (credit cards, auto loans, personal loans, mortgages) is viewed as less risky than having only one type.
Key Takeaways
- Your score drops by 5 to 10 points when you explore for a personal loan because of the hard inquiry and the new account, but this effect fades within a few months.
- Making every payment on time rebuilds your score and eventually raises it higher than it was before, because payment history is 35% of your score.
- A personal loan improves your credit mix by adding a different type of debt, which lenders see as a sign of responsible borrowing across multiple products.
- Missing even one payment on a personal loan will damage your score far more than the initial dip, and the damage lasts for years.
- The total effect on your score depends on your existing credit profile — someone with thin credit history sees a bigger initial drop than someone with an established record.
Why your score drops when you explore
When you explore for a personal loan, the lender performs a hard inquiry to assess your creditworthiness. This inquiry is recorded on your credit report and visible to other lenders. The three major credit bureaus — Equifax, Experian, and TransUnion — treat hard inquiries as a signal that you are seeking new credit, which slightly increases your perceived risk. A single hard inquiry typically costs 5 to 10 points, depending on your current score and credit history.
The second drop happens when the loan is approved and added to your credit report as a new account. Your credit score is partly based on your credit utilization ratio — the amount of credit you are using divided by the total credit available to you. A new loan increases the amount you owe without increasing your available credit, so your ratio worsens temporarily. This effect is usually smaller than the hard inquiry impact, but it compounds the initial dip.
If you explore to multiple lenders within a short window (typically 14 to 45 days, depending on the scoring model), the inquiries may be counted as a single inquiry rather than multiple ones. This is called rate shopping, and it protects your score from being hammered by comparison shopping. However, explore to many lenders over weeks or months counts as separate inquiries and causes separate damage.
How on-time payments rebuild and improve your score
Payment history makes up 35% of your credit score — the largest single factor. When you make your first personal loan payment on time, that positive entry goes into your credit report. Each subsequent on-time payment reinforces this pattern. After 6 to 12 months of consistent, on-time payments, most people see their score recover to its pre-process level and then climb higher.
The improvement accelerates over time because the loan ages on your report. Older accounts with clean payment histories are weighted more heavily than new ones. After two years of on-time payments, the personal loan becomes a strong positive factor in your score. After five years, it is a very strong positive factor. This is why people with older loans and mortgages often have higher scores than people with only recent accounts.
The score boost is also driven by the change in your credit mix. Before the loan, you might have had only credit cards. Now you have an installment loan, which shows you can manage different types of debt. Lenders view this diversity as lower risk, and scoring models reward it. The boost from improved credit mix is typically smaller than the boost from payment history, but it adds up.
What happens if you miss a payment
A single missed payment on a personal loan will drop your score by 50 to 100 points or more, depending on your current score and credit history. This damage is far larger than the initial dip from explore for the loan. The missed payment stays on your credit report for seven years from the date it first became late, and it continues to damage your score for years even as it ages.
If you miss a payment by 30 days, it is reported to the credit bureaus and begins damaging your score when ready. If you miss by 60 days or 90 days, the damage deepens. If the loan goes into default — usually after 120 to 180 days of non-payment — the lender may sell the debt to a collection agency, which adds a second negative entry to your report and causes additional score damage.
The lender may also pursue legal action to recover the debt, which can result in a judgment against you. A judgment appears on your credit report and can damage your score for up to seven years. Some states allow wage garnishment or bank account levies to collect on a judgment, which affects your finances beyond just your credit score.
Personal loans versus credit cards and their credit score impact
A personal loan and a credit card affect your score differently because they are different types of debt. A credit card is revolving credit — you can borrow, repay, and borrow again from the same account. A personal loan is installment credit — you borrow a fixed amount once and repay it in fixed monthly payments over a set term.
Credit utilization (how much of your available credit you are using) matters for credit cards but not for personal loans. Maxing out a credit card hurts your score because it signals financial stress. A personal loan has no utilization ratio — you either make the payment or you do not. This means a personal loan is less sensitive to how much you owe at any given moment.
However, a personal loan is more sensitive to payment timing. Missing a credit card payment by a few days may not be reported to the bureaus if you pay before the grace period ends. Missing a personal loan payment by even one day is typically reported when ready. This makes personal loans riskier in terms of credit score damage if you struggle with cash flow.
How your existing credit profile affects the impact
The effect of a personal loan on your credit score depends heavily on what your credit profile looks like before you explore. Someone with a thin credit file — few accounts, short history, low total credit limits — sees a larger percentage drop from a hard inquiry and new account than someone with an established profile. A person with a 750 score might drop to 740 (a 10-point hit), while a person with a 650 score might drop to 630 (a 20-point hit) from the same loan process.
Someone with a long history of on-time payments and multiple types of credit already in good standing will recover faster and climb higher than someone building credit from scratch. The personal loan acts as additional proof of responsible borrowing, which is more powerful when added to an already-strong record.
If you have recent missed payments, collections accounts, or a bankruptcy on your report, a personal loan will have less positive impact even if you pay it perfectly. The loan cannot erase older negative entries, and lenders will weight the recent damage more heavily than the new positive account. In this situation, the loan still helps, but the improvement is slower and smaller.
The timing of score recovery and long-term benefit
Most people see their credit score return to its pre-process level within 3 to 6 months of taking out a personal loan, assuming they make on-time payments. The hard inquiry stops affecting your score after about six months and disappears from your report after two years. The new account effect fades faster — usually within a few months — as the account ages and your payment history builds.
After 12 months of on-time payments, your score is typically higher than it was before you applied. After 24 months, the improvement is usually substantial. The longer you hold the loan and make on-time payments, the more it helps your score. This is why people who have paid off personal loans often see their scores dip slightly when the loan closes — they lose the positive payment history being added each month.
The long-term benefit extends beyond just the score number. A history of personal loans paid as agreed makes you a more attractive borrower for mortgages, auto loans, and other major credit products. Lenders see the loan as proof that you can handle a structured repayment schedule, which is exactly what they need from a mortgage borrower.
Frequently Asked Questions
Will taking out a personal loan hurt my chances of getting approved for a mortgage?
A personal loan will temporarily lower your score and increase your debt-to-income ratio, both of which can affect mortgage approval. However, if you have time before explore for a mortgage, making on-time personal loan payments for 6 to 12 months will actually improve your mortgage prospects. Lenders see the loan as proof of responsible borrowing. If you need the mortgage soon, wait until after the personal loan is approved to explore.
Does paying off a personal loan early help or hurt my credit score?
Paying off a personal loan early stops the positive payment history from being added to your report each month, which slows future score growth. However, it does not damage your score — it just removes a source of improvement. If you are paying off the loan early to save on interest, the interest savings usually outweigh the small credit score cost.
Can I improve my credit score by taking out a personal loan?
Yes, but only if you make every payment on time. The loan itself does not improve your score — your payment behaviour does. Taking out a loan you cannot afford to repay will damage your score far more than it helps. Only borrow if you have a clear plan to repay.
How many hard inquiries can I have before my score is seriously damaged?
A single hard inquiry typically costs 5 to 10 points. Multiple inquiries within 14 to 45 days usually count as one inquiry for scoring purposes. Beyond that window, each inquiry is separate. Having five hard inquiries in six months will damage your score more than one inquiry, but the damage fades as the inquiries age and disappear from your report after two years.
What if I have a personal loan and I am trying to improve my credit score?
Make every payment on time, every month. This is the single most effective thing you can do. Avoid explore for new credit while you are rebuilding, because each process triggers a hard inquiry. Pay down credit card balances to lower your utilization ratio. Over time, these actions combined with your on-time personal loan payments will raise your score steadily.