You applied to multiple lenders in search of a lender that will offer you a personal loan at lower interest rates and on better terms. But does applying for loans within a shorter duration affect your credit score? The answer is yes. Multiple personal loan applications within a short period of time negatively impact your credit score.
Know what a hard inquiry is-
Everytime you apply for credit, lenders will fetch your credit report from the credit bureaus (Experian, TransUnion CIBIL or Equifax) to assess your creditworthiness. Each such fetch is known as a hard inquiry. This reduces your credit score by a few points regardless of whether your application was approved or not. Such inquiries are recorded on your credit report.
How multiple loan applications hurt your credit score
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Now, when you apply to multiple banks and NBFCs for personal loans, each lender would initiate a hard inquiry, which would significantly reduce your credit score.
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Too many hard inquiries on your credit report increase the credit risk for the lender as it indicates that you are in urgent need of credit or financial stress and may have difficulty in repayment.
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This lowers your chances of your loan application being approved or approved at a higher personal loan interest rate.
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A high drop in credit score due to multiple hard inquiries can also affect the eligibility for credit cards and other types of loans, such as a home loan, business loan, etc.
Soft Inquiries over Hard Inquiries
Visit online financial marketplaces such as Paisabazaar to compare multiple personal loan offers from top banks and NBFCs. Compare interest rates, eligibility, charges, disbursal time and choose the one that suits your needs. The requests made through such marketplaces are considered soft inquiries by the credit bureaus, which do not negatively impact your credit score.
Does getting pre-approved loan offers hurt your credit score?
Getting pre-approved personal loan offers is considered a soft inquiry, as you did not apply for the loan and therefore does not impact your credit score. However, once you accept the pre-approved offer, a hard inquiry may occur, which may impact your credit score.
How can you reduce the impact of hard inquiries
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If you’re planning for a major purchase like an auto loan, it’s better to avoid applying for other forms of credit, such as credit cards, around the same time. This will reduce the impact of hard enquiries on your credit score.
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Check for pre-approval personal loan offers, as it is considered a soft inquiry. Such offers are usually offered at lower interest rates and at better terms. Additionally, it allows you to assess your personal loan eligibility without your credit score getting affected.