How Personal Loans Affect Your Credit, From Applying Through Repayment

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understanding personal loans

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There comes a time in most of our lives when we may need a personal loan. But taking on debt isn’t necessarily a bad thing. You may need to borrow money for one of life’s milestones, such as to afford the cost of college or to pay for your wedding.

Personal loans can be used for a variety of purposes, but they can also affect your financial health. Before taking out a personal loan, you may want to consider how this loan will affect your credit. As well as how you can borrow responsibly.

What comprises a credit score
How personal loans affect your credit
How to borrow responsibly

What comprises a credit score

There is a common financial misconception that you only have one credit score. In reality, you have industry specific scores, custom scores and scores determined by each of the three major credit bureaus. Before looking at how a personal loan can affect your credit history, it is important to know how your scores are determined.

Your credit score will vary depending on which scoring model is used to determine your score. FICO, who offers the most commonly used formula for calculating credit scores, uses the following formula to determine your credit score (Each consideration is weighted and that percentage is included below):

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

VantageScore 4.0 is another commonly used scoring model. The VantageScore 4.0 is calculated based on the following factors:

  • Payment history (41%)
  • Utilization (20%)
  • Age/mix of credit (20%)
  • New credit (11%)
  • Balances (6%)
  • Available credit (2%)

Understanding how your credit scores are determined can help you better understand how a personal loan and other financial products impact your credit. By building and maintaining healthy credit, you may qualify for more competitive rates and terms.

How personal loans affect your credit

The process of applying for and taking out a personal loan can affect your credit score. As can your repayment history of the loan. The following steps in the personal loan application and management process can potentially affect your credit score:

You’ll submit to a hard credit check to qualify: An unsecured personal loan doesn’t require you to put down collateral to qualify. Instead, your potential lender will review your credit report to determine whether or not you qualify for a loan. When the lender reviews your credit, you’re subjected to a hard credit inquiry.

Having too many hard inquiries on your report may have a negative effect on your score. Hard inquiries generally affect your credit score, because they help serve as a timeline of when you’ve applied for new credit. They can indicate different things to different lenders, but generally a hard inquiry may stay on your credit report for up to two years.

To minimize the impact of hard inquiries when comparison shopping with multiple lenders, it is best to do so in a short time frame. Usually, credit scoring models will count multiple hard inquiries as a single event if they are for the same type of credit product and occur in a short window of a few weeks.

You can also find lenders who offer prequalification with a soft credit inquiry. A soft inquiry won’t impact your credit scores and acts as a record of when someone checks your credit report. The difference between soft inquiries and hard ones are that soft inquiries generally occur when the check isn’t part of a credit-making decision, whereas a hard inquiry is used to make credit decisions by lenders.

With a prequalification, you can get an idea of what terms you may qualify for when shopping around for lenders. Once you choose a lender and formally apply, you’ll submit to a hard credit check.

A personal loan may improve your credit mix: Taking out a personal loan may boost your credit. Depending on what your existing credit types look like, taking out a personal loan can help you have a varied mix of credit types. Credit scoring models like FICO and VantageScore view a varied credit mix favorably, as it shows you can juggle different types of credit.

You’ll establish a positive or negative payment history with your loan: Creditors want to know that you can manage your debt responsibly over time — that’s why your payment history is an important factor in your credit score. If you make your personal loan payments on-time and in full, you can improve your credit score. However, if you fall behind on payments, you’ll damage your score.

Once you’re behind on payments, you may be considered in “delinquency” or in “default.” Debt is seen as delinquent the day after a missed payment. Default on the other hand, occurs when a borrower doesn’t pay back their debt according to the initial lending agreement.

Generally, defaulting entails missing successive payments over an extended period of time. The period between that first missed payment and going into default is what is considered delinquency. Once a debt is 30 to 90 days past due, your credit score will be negatively impacted because you may now be seen as a high-risk borrower.

Debt consolidation can improve your credit in different ways: If you choose to take out a personal loan in order to consolidate your debt, you may be able to improve your credit score.

When you consolidate debt with a personal loan, you pay down balances on high-interest debts (credit cards are a very common example) with a new loan. Debt consolidation can help you improve your credit score by lowering your credit utilization ratio, which looks at how much available credit you’re using. (Personal loan debt isn’t considered in your credit utilization ratio.) You could also use your loan to pay off delinquent debts.

If a consolidation loan helps you repay your debt, you can improve your debt-to-income (DTI) ratio over time, too. DTI is a comparison of the amount of debt you owe each month compared to your income. Lenders may consider your DTI when weighing credit options. The lower your DTI is, the better, in regards to lending; however, your DTI does not appear on your credit report and does not directly affect your credit scores.

How to borrow responsibly

Taking out a personal loan is a financial responsibility you have to be prepared to take on. Consider the following factors if you want to be a responsible loan borrower:

Know how you’ll spend the loan funds: There are some personal loan providers that don’t govern how you use your loan funds, though others may limit how it is used. Having a plan for how you’ll spend personal loan funds will help you decide not only the amount of your loan you might need, but also the lender best suited to work with you.

Calculate the amount you need: The first step in deciding if you should take out a personal loan is to determine exactly what you plan to spend the loan money on. This step will allow you to calculate the exact amount you need to borrow. You should also add on the costs of any loan fees if you don’t plan on paying for those out of pocket, or if the lender will take a cut before distributing loan funds.

Plan your monthly payments: Taking out a personal loan should not just be determined by how much money you need, but how much you can afford to borrow. To calculate how much you’ll pay monthly, take note of the initial borrowing amount, repayment length, and monthly interest rate. For help calculating your monthly payments, check out this loan payment calculator.

Avoid piling on new debt after consolidation: Consolidation may lower your monthly payments, but you should remember that your total debt load has not changed, just the way you are paying it off. If you continue to use high interest credit cards to make purchases you can’t afford or take on new debt, you will continue to hurt your financial health. Consider only using cash to make purchases while you pay down your debt. You may also want to create a new budget designed to help you manage debt as well as cover your living expenses.

Consider alternative options: Although personal loans are a flexible loan product you can use to fund various purchases or to consolidate debt, they’re not right for everyone. You need strong credit to qualify for the lowest personal loan rates. If your credit is hurting, you may not qualify for a personal loan, or only qualify for high rates.

Before taking on any new form of debt, it’s important to consider alternative financing methods to find the best option for your financial situation and needs. Consider the following:

  • Using an existing credit card may be an option if you can repay the balance by the due date. This is a good option for borrowing on the fly. However, if you can’t repay the debt in full, you’ll be hit with high interest costs.
  • Opening a new credit card with a 0% promotional APR is an option if you have strong credit. With this type of card, you can borrow interest-free, assuming you repay the debt before the introductory period ends.
  • Getting a salary advance may be a good option if you need funds quickly but don’t qualify for competitive rates on a loan. You can ask your HR department about taking a salary advance. Some companies have payroll advance programs that are designed to help their employees cover financial emergencies. Many of these programs don’t require any fees or interest, but the terms will vary by company.

When it comes down to it, only you can decide whether or not a personal loan is a good choice for you. Arming yourself with proper financial education is a key step in making sure that taking out a personal loan won’t negatively affect your financial situation and, ultimately, your credit. Carefully weigh your options, needs and wants.

When you’re ready to apply for a loan, research lenders online and locally. Apply for prequalification with each one to see what terms you may qualify for, and read through each lender’s fee structure. Once you’ve found what looks like a good deal, you may formally apply with a hard credit check.

Interested in a personal loan?

Here are the top personal loan lenders of 2019!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.990% APR to 16.240% APR (with AutoPay). Variable rates from 5.74% APR to 14.700% APR (with AutoPay). SoFi rate ranges are current as of March 18, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.74% APR assumes current 1-month LIBOR rate of 2.43% plus 4.28% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  5. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  6. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.79% – 20.89% (6.79% – 20.89% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 9.99% APR to a high of 35.99% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at

**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.

7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

5.74% – 16.24%1$5,000 - $100,000

Visit SoFi

7.46% – 35.99%$1,000 - $50,000

Visit Upstart

7.99% – 35.89%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

5.99% – 29.99%3$7,500 - $40,000

Visit FreedomPlus

6.79% – 20.89%4$5,000 - $50,000

Visit Citizens

9.99% – 35.99%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

Visit Earnest

9.95% – 35.99%8$2,000 - $35,000

Visit Avant

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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