Getting a personal loan can either help or hurt your credit score — it all depends on how you manage it. Simply applying for or receiving a personal loan isn’t automatically bad for your credit.
However, it can temporarily lower your score and may make it harder to qualify for more credit until you’ve made some progress on repaying the loan.
On the bright side, paying your personal loan on time can actually improve your credit score over time. If you’re thinking about getting a loan, make sure to shop around and compare your options — even if you have poor credit — so you can secure the most favorable terms possible.
How Applying for a Personal Loan Affects Your Credit Score
Your credit score is calculated based on five major factors:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Credit mix
According to FICO, new credit activity makes up 10% of your score, and credit mix also accounts for 10%. So when you apply for a personal loan, you’re adding a new line of credit, which can temporarily impact your score. Additionally, the total amount of debt you owe increases, which may affect the “amounts owed” part of your score.
Credit bureaus also keep an eye on how much new credit you’re taking on. For instance, if you apply for an auto loan soon after getting a personal loan, lenders may think you’re trying to borrow more than you can handle — and deny your application.
However, if you already have a strong track record of managing debt responsibly — such as paying bills on time and not maxing out your accounts — a single new loan won’t have a long-term negative effect.
Pro tip: The best way to prevent a personal loan from hurting your credit is to make every payment on time and stick to the loan terms.
How People Typically Use Personal Loans
According to a national survey by Investopedia, most people who took out personal loans between August and September 2023 used the funds for debt consolidation — combining multiple debts into one. Others used them for home repairs, renovations, or other big expenses.
How a Personal Loan Can Actually Help Your Credit Score
Successfully managing a personal loan can boost your credit. When you repay the loan as agreed, it shows lenders that you’re responsible with money and capable of managing debt.
Interestingly, people who avoid debt entirely may actually have low credit scores — not because they’re irresponsible, but because they have no credit history. Without borrowing and repaying over time, there’s nothing for credit bureaus to evaluate.
So, using a personal loan wisely and repaying it on time can actually be a smart way to build or improve your credit profile.
What Credit Score Do You Need to Qualify for a Personal Loan?
Credit scores from FICO fall into five categories:
- Poor (Below 580): Seen as high risk; approval is tough.
- Fair (580–669): Some lenders might approve, but terms may not be great.
- Good (670–739): Considered average or slightly above; most lenders approve.
- Very Good (740–799): Strong score; borrowers receive better interest rates.
- Exceptional (800+): Excellent score; eligible for the lowest rates and best terms.
Generally, a score above 670 shows lenders that you’re trustworthy, increasing your chances of getting approved for a loan with favorable terms like lower interest rates and smaller monthly payments.
However, your credit score isn’t the only thing lenders look at. They also consider:
- Your income
- Your bank balance
- How long you’ve had your current job
If you’re in a financial emergency and need cash quickly — especially with bad credit — finding the right loan can be overwhelming. But don’t panic. There are emergency personal loans available, even for people with low credit scores.
What Can You Use a Personal Loan For?
You can use personal loan funds for almost anything. Here are a few common examples:
- Paying off tax debt
- Making home improvements
- Covering unexpected medical expenses
- Handling car repairs
- Paying for weddings or funerals
- Consolidating credit card debt
Just be sure to use the money wisely — using it for non-essential or luxury items might not be the best move, especially if your budget is already tight.
What Interest Rate Will You Get on a Personal Loan?
The interest rate you get depends largely on your credit score and credit history. The better your credit, the lower your rate. If you have a high score and a solid history of on-time payments, you may qualify for competitive rates and affordable monthly payments.
According to data from Q4 2025, the average interest rate for a 24-month personal loan was 12.32%. But remember — rates can range anywhere from 6% to 36%, depending on the lender and your personal finances.
Does Taking Out a Personal Loan Hurt Your Credit Score?
Yes — but just a little, and only in the beginning. When you apply for a loan, the lender does a hard credit check, which can slightly lower your score.
However, this drop is usually temporary. If you make on-time payments every month, your score will likely bounce back — and possibly even improve.
On the flip side, if you miss payments or default on the loan, your credit score could take a major hit. This can make it harder to borrow money in the future, and it may take years to recover from the damage.
The Bottom Line
Getting a personal loan can cause a small, short-term dip in your credit score. But if you’re responsible — making payments on time and not borrowing more than you can handle — a personal loan can help build your credit over time.
A personal loan can be a useful tool, especially if you’re looking to consolidate debt or manage large expenses. But it’s important to use it wisely, read the fine print, and stay on top of your payments.
If you’ve already taken out a personal loan and had trouble keeping up — such as late payments or even default — you might want to look into reputable credit repair services. These companies may be able to help you remove negative marks from your credit report and get you back on track.
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