How Does a Personal Loan Impact Your Credit?

If you apply for a personal loan, your credit score gets hit in the short-term. Plus, your income source is now known to your lenders. If you go to get any big loan or line of credit such as a mortgage next year, this could affect your eligibility down the line.

Each credit application will be added to your credit history, making more applications more impactful. But if you have a strong credit history, this level will typically not affect the amount of credit you are approved for, and rates will remain unchanged.

What Is a Personal Loan?

A personal loan is basically borrowing to be used for other things. When you take out a loan, you promise to pay the lender back with interest over the term you negotiated—which, in most cases, is usually one to five years. Instead of lending only to businesses, banks, and mortgage companies have gotten into the personal loan game.

A personal loan is exactly what the name implies: an unsecured loan for short-term use, preferably smaller amounts. This contrasts with mortgages, auto loans, and other types of installment loans, which usually have a larger credit limit or fixed repayment plan. Repayment terms for personal loans vary; some have fixed terms of 6 or 12 months, while others are for a longer duration, such as 12 or 60 months.

How a Personal Loan Can Help Your Credit

If you spend your loan on something with high savings potential, like paying off debts, this will help your credit score over time. Personal loans are a quick way to build your credit. It works like this:

  1. You have good credit.
  2. You use it to get approved for a small personal loan.
  3. You live up to your end of the deal, repay on time, and rebuild your score.

You mustn’t abuse the privilege by getting too many personal loans too often. And more than anything else, when it comes to building strong credit, always pay off your loans.

How Personal Loans Can Hurt Your Credit

Just like other loans, personal loans are considered revolving debt. This has two meanings. First, you won’t be paying it off, so the balance gets rolled over into another loan. Second, lenders assign a maximum credit limit to your personal line of credit—that means if you spend too much within that limit, you risk dipping into your overall credit limit. Even though you might not like it, this hurts your score when you pay down other loans. Good news: so long as you can afford the payments, personal loans don’t impact your credit score.Bad news: the APR on a personal loan is usually very high, and if you can’t smoothly make those payments on time every month, it’s going to damage your credit score. And if you get a lot of personal loans over a short period of time, there’s a chance they’ll reject your application for another one — especially if it’s a big loan.

When to Consider Taking Out a Personal Loan

You might want to take out a personal loan if you need money in the short-term rather than the long-term (like a vacation or wedding ). If you’re facing a financial emergency, it can also be a great option. Just remember, you have to pay back whatever you borrow by your set deadline.

It’s a wise idea to take out a personal loan when your other options have been exhausted. You really need to tread lightly and be a little wary of personal loans, or you can wind up in a pile of trouble. It doesn’t matter much if you keep your credit score high and your bills up to date – if you don’t pay off your personal loans, they’ll still hurt you. The last thing I want is for anyone to think that taking out personal loans means you shouldn’t care about how you use cash! Show Me How to Use Personal Loans Responsibly

Shopping for a personal loan

If you have had trouble making payments on your debts, you mustn’t get a personal loan to pay off those older debts. While I’m not downplaying the value of shopping around for the best interest rate, I do want you to be mindful of other costs like fees and a higher APR. After all, when you take out a personal loan, your credit score won’t matter too much if you can keep up with the payments.

Applying for a personal loan

Sure, but I’m sure you already know where to go online to take out a personal loan. It’s an important piece of advice, though: with a paycheck loan, the paperwork usually takes longer. When you’re taking out a personal loan for something like a car, buying a plane ticket, or financing your education, and your interest rate is higher, you have two choices: pay it off or pay other debt first. Just know when you decide to get that personal loan that you’ll have to make payments over time, like any other type of debt you owe. I wouldn’t discourage anyone from taking out a personal loan to help their situation – and even though payday loans are generally better options for short-term needs, there’s still a place for personal loans in the market.

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