Personal loans lower your credit score when you first take them out, then help it recover if you make on-time payments

A personal loan creates two when ready hits to your credit score. The lender runs a hard inquiry (also called a hard pull), which typically drops your score by a few points. At the same time, the new loan account itself appears on your credit report, and opening new credit also lowers your score temporarily. Most people see a drop of 5 to 10 points, though the exact amount depends on your credit history and how many recent inquiries you have.

The damage is temporary. After six months to a year of on-time payments, your score usually recovers and climbs higher than it was before you borrowed. This happens because personal loans add payment history (the largest factor in your score) and credit mix (having different types of credit—cards, installment loans, mortgages—is better than having only one type). The longer you keep making payments on time, the more your score benefits.

Key Takeaways

  • Hard inquiries and the new account itself will lower your score by 5 to 10 points in the first month.
  • Your score recovers within six months to a year if you make every payment on time.
  • Personal loans help your score more than credit cards do because they show you can manage installment debt, not just revolving credit.
  • Paying off the loan early does not hurt your score, but it also does not help it as much as making regular payments over time.
  • The interest rate you receive depends on your credit score at the time you explore, so a lower score means you pay more in interest.

Why a hard inquiry and new account both lower your score

When you explore for a personal loan, the lender checks your credit report to decide whether to lend to you and at what rate. This check is a hard inquiry, and it signals to credit bureaus that you are actively seeking new credit. Hard inquiries stay on your report for two years but only affect your score for about three to six months. A single hard inquiry usually costs 5 points or fewer, but multiple inquiries in a short time (say, three loan applications in two weeks) can add up.

The new loan account itself also lowers your score because it reduces your average age of accounts. If you have had credit for ten years and suddenly open a new account, your average age drops. Credit bureaus interpret younger accounts as slightly riskier. This effect also fades over time as the account ages.

The good news: these two effects are temporary and expected. Lenders know that new borrowers will see a dip. If you are shopping for the best rate, try to do all your applications within 14 days. Credit scoring models treat multiple inquiries in a short window as a single inquiry, so you avoid stacking penalties.

How on-time payments rebuild your score faster than the initial drop

Payment history makes up 35 percent of your credit score—the single largest factor. A personal loan gives you a new payment to make every month, and each on-time payment is recorded on your credit report. After three months of on-time payments, credit bureaus see a pattern. After six months, your score usually climbs back to where it started. After a year, it often sits higher than it was before you borrowed.

This recovery happens even if you are paying interest. The score does not care whether you pay $500 or $600 a month; it only cares that you paid on time. Making extra payments or paying ahead does not speed up the recovery—the benefit comes from the consistent, predictable payment pattern.

The boost is stronger if you have a thin credit file (few accounts or a short history). Someone with only a credit card and no installment loans will see a bigger score jump from a personal loan than someone who already has a car loan and a mortgage.

Personal loans help your score more than credit cards do

Credit mix makes up 10 percent of your score. Credit bureaus want to see that you can handle different types of credit: revolving credit (credit cards, where you borrow and repay on a flexible schedule) and installment credit (loans with a fixed payment and end date). A personal loan is installment credit, so it diversifies your credit profile in a way a new credit card does not.

If you already have several credit cards but no personal loans or car loans, adding a personal loan will boost your score more than opening another credit card would. The boost is modest—usually 10 to 20 points over time—but it is real. If you already have a mortgage and a car loan, the benefit of adding a personal loan is smaller.

What happens to your score if you pay off the loan early

Paying off a personal loan early does not hurt your score, but it also does not help it as much as making regular payments over the full term. The benefit of a loan comes from demonstrating that you can manage a payment obligation over time. If you borrow $10,000 and pay it back in three months, you have shown less payment history than if you pay it back over three years.

That said, the interest savings from paying early usually outweigh the modest score benefit of keeping the loan open longer. If you have the cash to pay off the loan, paying it off is almost always the right financial move. Your score will still be higher than it was before you borrowed, and you will have saved thousands in interest.

After you pay off the loan, the account stays on your credit report for seven years. It continues to help your score during that time because it shows a history of on-time payments. You do not need to keep the account open or active for it to help you.

How your credit score affects the interest rate you receive

Personal loan interest rates are tied directly to your credit score at the time you explore. A score of 750 might get you 6 percent interest, while a score of 650 might get you 12 percent on the same loan amount. Over the life of a $10,000 loan, that difference means paying thousands more in interest.

This creates a catch: if your score is lower, you pay more to borrow, which makes it harder to afford the loan. If your score is higher, you pay less. Before you explore for a personal loan, check your credit report for errors and consider waiting a few months to pay down credit card balances if your score is below 650. Even a 50-point improvement can save you hundreds in interest.

The difference between hard and soft inquiries

Not every credit check is a hard inquiry. When you check your own credit report, that is a soft inquiry and does not affect your score at all. When an employer runs a background check or a credit card company checks your account, that is also soft. Soft inquiries do not lower your score and do not show up on the version of your report that lenders see.

Hard inquiries happen only when you explore for credit: a loan, a credit card, a mortgage, or a car loan. Each hard inquiry can lower your score, but the effect is small and temporary. If you are rate-shopping for a mortgage or auto loan, do all your applications within 14 days to minimize the impact.

Frequently Asked Questions

How long does a hard inquiry stay on my credit report?

Hard inquiries stay on your report for two years, but they only affect your score for about three to six months. After six months, the impact is usually negligible. After two years, the inquiry disappears from your report entirely.

Will taking out a personal loan hurt my ability to get a mortgage later?

A personal loan will lower your score temporarily, but it will not disqualify you from a mortgage. Mortgage lenders care more about your overall debt-to-income ratio and payment history than about a single new loan. If you take out a personal loan and make on-time payments for six months before explore for a mortgage, your score will likely be higher than it was before you borrowed.

Does paying off a personal loan early damage my credit score?

No. Paying off early does not hurt your score. Your score may not climb as quickly as it would if you made regular payments over the full term, but the account will still help your score after it is closed because it shows a history of on-time payments.

Can I improve my credit score by taking out a personal loan?

Yes, but only if you make on-time payments. The loan itself will lower your score by a few points at first, but after six months to a year of consistent payments, your score will usually be higher than it was before you borrowed. This works best if you have few accounts or a short credit history.

What is the difference between a hard inquiry and a soft inquiry?

A hard inquiry happens when you explore for credit and lowers your score temporarily. A soft inquiry happens when you check your own credit, when an employer runs a background check, or when a company checks your account—and it does not affect your score at all.