There are hundreds of reasons to take out a personal loan. Whether it’s to make a large purchase, or to cover an unexpected medical expense, it could really change how you look at the matter.
According to the Chamber of Commerce, over 19 million Americans have gone the personal loan route, and it’s worth considering taking that option ourselves.
But we have to know how it will impact our credit. According to my research, this is no easy question to answer. The fact is, a personal loan could either help or hurt your score. We’ll dive into the three main ways a personal loan can impact your score, and then talk about how to make your decision based on those points.
The first thing to find out about a personal loan is whether the application will show up as a “hard” or “soft” inquiry. A hard inquiry is almost universally bad for your credit. Even if you have great credit, a hard inquiry could still drop your score by a few points.
A soft inquiry, on the other hand, doesn’t impact your score.
Reputable lenders will tell you up front whether the application will result in a hard or soft inquiry. If you think your credit score can withstand a slight hit, and you’re reasonably assured you’ll get the loan, then the only thing to consider is whether getting the actual funds is worth it. In the case of a large purchase, you may want to save up for it instead. In emergency situations, of course, you might not have that option.
Current Credit Mix
If you currently have a lot of credit cards, then adding a personal loan could have a huge positive impact on your credit score. This is for three important reasons:
The last thing to consider when looking at whether a personal loan will hurt or help your credit is the payment schedule. You need to take an honest, thorough look at your income and expenses and decide if you can make the payments on a personal loan.
If you cannot keep up with the payments, the Credit Bureaus will hear about it, and missed payments will hurt your score. And a default will really hurt it.
In the end, if you’re responsible about your payments, and you use the personal loan to pay off higher interest credit cards, then the personal loan can really boost your credit. On the other hand, if you don’t get the loan, and suffer a hard inquiry, that will hurt your score.
Furthermore, if you’re unable to keep up with the payments, and don’t use the loan to drive down your other credit utilization, then a personal loan will hurt your score.
It’s a safe bet that a substantial personal loan without collateral is going to result in a hard inquiry. Also, every good lender will tell you up front during the application process if it will be a hard inquiry.
That’s a great question. I actually found a great calculator here. It’s free, and using it won’t affect your credit at all. Using it, you can find out what your monthly payments on certain loans will be before even applying for them.