The Two-Way Street of Personal Loans and Credit Scores

Planning an event, revamping your home, or tackling an unexpected expense? An instant personal loan online can offer a quick financial solution. But a common question that arises is: Does taking a personal loan affect your credit score? Or does your credit score affect a personal loan application? If you are unaware or even unsure about the link between a personal loan and credit score, this guide will help you understand what to expect.

Does a Personal Loan Affect Credit Score?

Yes! Personal loans do affect your credit score, and the impact can be either positive or negative, depending on how effectively you manage the loan.

A Personal Loan Triggers a Hard Inquiry

Applying for a personal loan means the credit report will be the first thing the lender checks to decide your creditworthiness. This is typically known as a hard inquiry. While one or two inquiries might not affect your score that much, multiple loan applications within a short period may lead lenders to view you as a credit risk, which can affect your credit score negatively.

On-Time Repayments

If you want to know how a personal loan affects your credit score in the long run, the simple answer lies in your repayment behaviour. Timely EMI payments are positively reported to credit bureaus and help build a strong credit history.

Credit Mix

Credit mix refers to the variety of credit types you hold, such as credit cards, home loans, or personal loans. Lenders prefer a healthy mix because it shows that you can manage a variety of credits responsibly.

How Does CIBIL Score Affect Your Personal Loan?

Lenders use credit scores to assess the risk associated with lending you the loan amount and your ability to repay the loan. A higher score means responsible financial behaviour. This means lower interest rates and better loan terms, whereas a lower credit score may result in higher interest rates and increased challenges in loan approval. So, regularly monitoring your CIBIL score is recommended. You can use a free credit score tool to get insight into your financial health and habits.

Does a personal loan affect credit score? Yes! Does your credit score affect your loan application? Also, yes! The relationship between a personal loan and your credit score is a two-way street. Your credit score directly impacts your loan application and the terms you are offered, whereas how you manage that loan directly impacts your future creditworthiness.