Do Personal Loans Affect Your Credit Rating
As you contemplate whether or not you should pursue a personal loan, it's correct to consider how doing so could affect your credit score. The reality is getting yourself involved with a personal loan (unsecured) is definitely going to affect your credit score one way or another. The most important question is, "how will it affect your credit score."
As you start the process of finding a lender, you should be aware there are four steps in the personal loan process. The four steps include:
- Searching for the right lender/loan
- Submitting an application
- Getting the approval or decline notice
- Making your payments
At this point, we would like to help you understand how each step is going to affect your credit score one way or another. This knowledge will surely benefit you in the long run.
Searching for the Right Lender/Loan
Assuming your credit score is in fairly good shape, you should have no problem finding a lender that would be willing to grant your loan. It's your responsibility to "shop" for the best possible option. To be clear, the best possible option is going to be the one that gives you the most favorable terms (payments, interest rate).
As you shop for the right lender and loan, each lender is going to most likely submit what the lending industry calls a "soft credit check." The purpose of such a credit check is to make sure that absent any hidden derogatory issues, the lender feels you are creditworthy. The good news is soft credit checks will have no affect on your credit score. At this point, you will also get a personal loan estimate.
Submitting an Application
Once you start submitting online loan applications, the game changes. As part of each online personal loan application, the lender is going to run a "hard credit check." They will be looking at your credit history and other factors in great depth.
The credit reporting agencies will pick up the personal loan online inquiries and place a small hit downwards on your credit score. In most cases, the downward hit would only be 5-10 points. That doesn't change anything in regards to your creditworthiness. Where you have to be careful is don't be submitting multiple online personal loan applications at the same time. When credit reporting agencies see that kind of activity, they get a little nervous. Four or five hits of 10 points each could adversely affect your credit. That's exactly why you need to shop around enough to locate no more that two lenders that have what you need before submitting applications.
Getting the Approval
Once the personal loan online is approved and the money in hand, your credit score is going to go down. The amount of the drop will depend a great deal on the amount of new debt, plus the fact it's unsecured debt. At this point, there's no need to worry about your credit score drop. It's easy to start rebuilding. You might also want to be very careful about taking on anymore debt in the immediate future. The surest way to drastically hinder your credit score, aside from default, is to over extend yourself.
Making Your Payments
With money in hand, you'll be doing what you do. Whatever you do, you need to make all your payments on time. If you have any notion that credit reporting agencies view unsecured personal loans any different that other debt, you need to drop that notion. Remember, credit cards are unsecured debt, effectively personal loans. All the same rules that apply to credit card debt are going to apply to your personal loan debt.
At this point, the direction of your credit score is in your hands. When you make your payments on time, your score is going to improve. If you are late or miss payments, you can expect a drop in your score. It really is that simple.
You are now fully aware of how pursuing, securing and living with a personal loan affects your credit. This knowledge should enable you to make educated decisions. As always, you should never take on more debt that you feel you can repay without creating financial turmoil in your life.