Personal loans can impact your credit score in a few different ways. Here we’ll help you understand how applying for a personal loan can influence your credit score.
What is a personal loan?
A personal loan is a type of loan that you can use for various personal expenses, such as consolidating your debt, making home improvements or covering an unexpected bill. Unlike a mortgage or a car loan, a personal loan is usually unsecured, which means it doesn’t require collateral – like your house or car. Instead, lenders assess you based on your credit score and income.
How do you check your credit score?
You can check your credit score in a variety of different ways. Agencies such as Experian, Equifax and Clearscore will be able to provide you with an accurate credit score.
What is a loan agreement?
A loan agreement is a legally binding contract between a lender and a borrower. You might need a solicitor such as https://www.parachutelaw.co.uk/loan-agreement to help you create a loan agreement, to make sure that the terms are fair, transparent and compliant with any legal requirements.
Does getting a loan reduce your credit score?
Yes, getting a personal loan can initially reduce your credit score, but the impact will depend on how you handle the loan and whether you make payments on time. Also, applying for a loan will usually trigger a hard search on your credit report, which may cause a small drop in your credit score. However, the negative impact is usually temporary, and your score can improve if you make consistent payments on time.
Will applying for a personal loan affect your credit score?
Yes, even just applying for a personal loan can have an effect on your credit score. Each hard inquiry can lower your score by a few points and multiple inquiries within a short period can really add up, especially if you are applying for several loans over a short period of time. If you are declined for multiple loans, this will show up on your credit score and negatively affect your application.
