How Personal Loans Impact Your Credit Score and Creditworthiness

Planning a wedding, a home renovation, or managing an unexpected expense? A personal loan can be a lifesaver in situations where you need access to funds quickly and can repay them in EMIs over a period. You would be well aware that a good credit score makes it easier for you to get a personal loan and may also reduce your cost of credit. However, it is equally correct that the personal loan impacts your credit score too. Let us find out how personal loans can impact your credit score.

How Does a Personal Loan Impact Your Credit Score?

A personal loan is one of the most sought-after credit products these days and has high potential to impact your credit score. However, the kind of impact, positive or negative, completely depends on your credit behaviour and how you handle this product. Let’s understand how to manage your personal loan smartly to have a positive impact on your credit score.

1. Personal Loan Application Process

When you apply for a personal loan, a hard enquiry is triggered and is featured in your credit report. Too many credit enquiries for a loan may impact your credit score negatively.

You should do proper research, compare various loan options before applying, and go ahead only with the options where your requirements are best met and the chances of approval are the highest.

Paisabazaar can help you compare various loan options in one place and also suggest the best available option that you can directly apply from your Paisabazaar account.

2. Disciplined Repayment Behaviour

Your repayment behaviour plays an important role in determining how your personal loan would impact your credit score. Every EMI repayment features in the DPD section of your credit report. Timely repayment of all EMIs will ensure zero DPDs and impact your credit score positively.

Any missed payment would be mentioned in the DPD section, and repeated delays in repayment or a delay of more than 90 days would spiral your credit score downwards.

Also Read: DPD in Credit Report

3. Improved Credit Mix

Credit mix is a list of various credit products you have handled in your financial life. A healthy credit mix contains an optimum mix of unsecured as well as secured credit.

Secured credit, such as a home loan or a car loan and unsecured credit, such as a personal loan or a credit card, are mentioned in your credit report. A mix of different credit accounts in your profile shows lenders that you have diligently handled multiple products in the past.

This increases the trust of lenders, and they may offer you loans on relaxed terms. However, no lender would reject your credit application only because you have not handled a specific credit product in the past.

4. Closing a Personal Loan Successfully

A successfully closed personal loan account has a positive impact on your credit score. This shows that you have handled the product smartly and repaid all dues on time, increasing the trust of lenders in your credit profile.

Once closed, look for the status in your credit report if it’s correctly mentioned as “closed” and not “settled”. Always try to close your account and refrain from settling the personal loan after non-payment. Where a closed loan account improves your score, a settled credit account can lower your score significantly.

Suggested Read: Why should you not Settle a Credit Account

Is a Personal Loan Bad for Your Credit Score?

A personal loan enables you to meet immediate financial obligations without much difficulty, and a good credit score can help you get it almost instantly. However, non-repayment of dues on time can impact your credit score and defaulting on your loan would make it almost impossible to avail credit in future.

Many borrowers looking to rebuild their credit score resort to short-term personal loans and close their accounts successfully after repayment to regain the trust of the credit bureaus and lenders for their planned loan in future.

Thus, a personal loan, as a product, cannot be considered bad for your credit score. It is used to improve your credit score as well.

Suggested Read: Ways to Improve Your Credit Score

Does Taking a Personal Loan Affect the Credit Score Negatively?

When you take a personal loan, you might see a temporary fall in your credit score. This should not be of grave concern, as your credit score would start improving as soon as you start repaying your loan on time.

When you close your loan after complete repayment, your credit score may see a spike as your creditworthiness tends to increase after successful repayment.

A personal loan is a double-edged sword and, if handled smartly, it can help improve your credit score. But if financial discipline is not followed, your credit score may get severely damaged. You should always keep the pointers mentioned above in mind while applying for a personal loan, repaying dues and at the time of closing the loan account to maintain a high credit score and stay eligible for the best loan and credit card offers in future.