When it comes to paying for some of life's biggest expenses — a home renovation, a big medical bill, an emergency, a wedding or even a funeral — many people find themselves short on the cash needed to cover these costs right away.
A personal loan is a form of credit that can come in handy in these instances. And according to a 2019 Experian study, personal loans are the fastest growing form of debt in the U.S. But when it comes to taking on any form of additional debt, consumers should take time to think about how this new line of credit can affect their financial life, including their credit score.
So does taking on a personal loan impact your credit score positively or negatively? Really, it depends.
Why use a personal loan in the first place
Personal loans generally allow you to borrow money at a much lower interest rate than if you were to put the expenses on a credit card. According to the Federal Reserve, the current average APR for a two-year personal loan is 9.58%. By contrast, the average interest rate on a credit card is 16.30%, but can be as high as 24%. So a personal loan can be a cost-effective way to cover a big expense or consolidate debt.
How a personal loan can help your credit score
Taking on a personal loan can help improve your credit mix. Your credit mix refers to the different types of credit accounts you have, including credit cards, loans, mortgages, etc., and it makes up 10% of your credit score.
While it's not necessary to have one of each type of account, having a variety of accounts can show lenders that you have the ability to manage multiple types of credit. This can help you, as financial institutions are more likely to see you as a more creditworthy borrower when you apply for a new form of credit, like a mortgage or car loan. (Just make sure you're not taking on too much debt.)
Personal loans can also help you establish a track record for making on-time payments. Payment history is the most important factor in calculating your credit score — it makes up 35% of it. Making your monthly payments on time and in full can provide clues to a lender that you are very likely to continue paying back the money you owe, should you apply for another line of credit in the future.
This is especially important when you're just starting to build or improve your credit. In fact, while a low credit score is typically a road block to getting approved for most loans, some lenders actually offer personal loans that are geared toward people with fair or bad credit.
Upstart, for example, accepts applicants with a credit score of 600 or below and even those whose credit history is so insufficient that they don't even have a credit score.
OneMain Financial Personal Loans also offers an option for those with fair or poor credit. Before you apply, just keep in mind that taking on a personal loan with poor credit means that you may pay higher interest rates and some fees.
Upstart Personal Loans
Annual Percentage Rate (APR)
7.8% - 35.99%
Loan purpose
Debt consolidation, credit card refinancing, wedding, moving or medical
Loan amounts
$1,000 to $50,000
Terms
36 and 60 months
Credit needed
FICO or Vantage score of 600 (but will accept applicants whose credit history is so insufficient they don't have a credit score)
Origination fee
0% to 12% of the target amount
Early payoff penalty
None
Late fee
The greater of 5% of monthly past due amount or $15
Terms apply.
OneMain Financial Personal Loans
Annual Percentage Rate (APR)
18.00% to 35.99%
Loan purpose
Debt consolidation, major expenses, emergency costs
Loan amounts
$1,500 to $20,000
Terms
24, 36, 48, 60 Months
Credit needed
Poor/Fair
Origination fee
Origination fee starting at $25 to $500 or percentage ranging from 1% to 10% (depends on your state)
Early payoff penalty
None
Late fee
Up to $30 per late payment or up to 15% (depends on your state)
Click here to see if you prequalify for a personal loan offer. Terms apply.
Not all applicants will be approved. Loan approval and actual loan terms depend on your ability to meet our credit standards (including a responsible credit history, sufficient income after monthly expenses, and availability of collateral) and your state of residence. If approved, not all applicants will qualify for larger loan amounts or most favorable loan terms. Larger loan amounts require a first lien on a motor vehicle no more than ten years old, that meets our value requirements, titled in your name with valid insurance. APRs are generally higher on loans not secured by a vehicle. Highly-qualified applicants may be offered higher loan amounts and/or lower APRs than those shown above. OneMain charges origination fees where allowed by law. Depending on the state where you open your loan, the origination fee may be either a flat amount or a percentage of your loan amount. Flat fee amounts vary by state, ranging from $25 to $500. Percentage-based fees vary by state ranging from 1% to 10% of your loan amount subject to certain state limits on the fee amount. Visit omf.com/loanfees for more information. Loan proceeds cannot be used for postsecondary educational expenses as defined by the CFPB's Regulation Z such as college, university or vocational expense; for any business or commercial purpose; to purchase cryptocurrency assets, securities, derivatives or other speculative investments; or for gambling or illegal purposes.
Borrowers in these states are subject to these minimum loan sizes: Alabama: $2,100. California: $3,000. Georgia: $3,100. North Dakota: $2,000. Ohio: $2,000. Virginia: $2,600.
Borrowers in these states are subject to these maximum loan sizes: North Carolina: $9,000 for unsecured loans to all customers, $9,000 for secured loans to present customers. Maine: $7,000. Mississippi: $12,000. West Virginia: $14,000. Loans to purchase a motor vehicle or powersports equipment from select Maine, Mississippi, and North Carolina dealerships are not subject to these maximum loan sizes.
Example Loan: A $6,000 loan with a 24.99% APR that is repayable in 60 monthly installments would have monthly payments of $176.07.
Time to Fund Loans: Funding within one hour after closing through SpeedFunds must be disbursed to a bank-issued debit card. Disbursement by check or ACH may take up to 1-2 business days after loan closing.
How a personal loan can hurt your credit score
Of course as with any form of credit, irresponsible use of a personal loan can have a negative impact on your credit score. And much like with any other loan, mortgage, or credit card application, applying for a personal loan can cause a slight dip in your credit score. This is because lenders will run a hard inquiry on your credit, and every time a hard inquiry is pulled, it shows up on your credit report and your score drops a bit.
As a result, you may want to be strategic about when you decide to apply for a personal loan. Applying for a personal loan soon after applying for a new credit card could cause an even bigger drop in your credit score since a hard inquiry would be run for both applications.
Many lenders offer an online tool you can use to figure out what interest rate you'd likely qualify for based on your information. Getting an estimate won't hurt your score and you can be sure you're getting the best interest rate before you submit your application.
This tool is provided and powered by Engine by Moneylion, a search and comparison engine that matches you with third-party lenders. Any information you provide is given directly to Engine by Moneylion and it may use this information in accordance with its own privacy policies and terms of service. By submitting your information, you agree to receive emails from Engine by Moneylion. Select does not control and is not responsible for third party policies or practices, nor does Select have access to any data you provide. Select may receive an affiliate commission from partner offers in the Engine by Moneylion tool. The commission does not influence the selection in order of offers.
Another thing to keep in mind is that personal loans can be really useful tools for debt consolidation and paying off debt. However, the habits that got you into debt in the first place can cause a personal loan to feel more like an extra financial burden.
For example, if you take on a personal loan to pay off a maxed out credit card but then go ahead and max out the credit card again immediately after, you'll be stuck with more credit card debt and a personal loan to pay off.
This debt cycle can also negatively impact your credit score if the burden of extra payments is so high that you begin missing monthly payments or don't make payments in full and hurt your credit utilization ratio.
Always make sure you have a plan to pay off any additional debt you take on before you even submit your application. And getting to the root of any not-so-healthy financial habits can ensure that you actually solve the problem instead of just managing a symptom of the problem.
Bottom line
A personal loan can be an affordable way to fund a large expense, cover an emergency or even consolidate debt. But much like with any other form of credit, its impact on your credit score can depend on how it's used.
A slight dip in your score after applying is generally to be expected since a lender will run a hard inquiry on your credit. But using a personal loan to diversify your credit mix and making on time payments toward your balance can have a positive impact on your score.
Just be cognizant of any unhealthy financial habits that could easily turn a personal loan from a resource to a burden.
