How Personal Loans Affect Your Credit, From Applying Through Repayment

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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.

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Student Loan Hero Advertiser Disclosure

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.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

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.

RATES (APR)loan amount
5.99% – 20.01%1 $5,000 to $100,000
6.14% – 35.99% $1,000 to $50,000
6.98% – 35.89%* $1,000 to $50,000
99.00% – 199.00%2 $500 to $4,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
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NMLS #1136: Terms & Conditions Apply
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 20.01% APR (with AutoPay). Variable rates from 6.49% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of November 15, 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 6.49% APR assumes current 1-month LIBOR rate of 1.81% plus 4.93% 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. 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.
  5. 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. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Opploans.

Opploans Disclosures

Direct Deposit required for payroll.

Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.

  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
  2. NV Residents: The use of high-interest loans services should be used for short-term financial needs only and not as a long-term financial solution. Customers with credit difficulties should seek credit counseling before entering into any loan transaction.

  3. OppLoans performs no credit checks through the three major credit bureaus Experian, Equifax, or TransUnion. Applicants’ credit scores are provided by Clarity Services, Inc., a credit reporting agency.

  4. Based on customer service ratings on Google and Facebook. Testimonials reflect the individual’s opinion and may not be illustrative of all individual experiences with OppLoans. Check loan reviews.

  5.  

    Rates and terms vary by state.

3 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.
4 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com 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.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 6.98%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** 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.

Published in Loans, Personal Finance

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