Personal loans lower your credit score when you first take them out, but can 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 — a formal check of your credit report — which typically drops your score by a few points. Then the new loan itself appears on your report as a new account, which lowers your score further because it reduces your average account age and adds a new debt obligation. The size of the drop depends on your current score and credit history, but most people see a 10 to 50 point decrease in the first few weeks.

After that initial dip, the loan can actually help your score recover — but only if you make every payment on time. Personal loans are installment accounts, meaning you pay a fixed amount each month for a set number of years. Payment history is the largest factor in your credit score, accounting for about 35 percent of the calculation. Twelve months of on-time payments can offset the initial damage and push your score higher than it was before you borrowed.

Key Takeaways

  • A hard inquiry and the new account itself will lower your score by 10 to 50 points when ready after you take out a personal loan.
  • On-time monthly payments rebuild your score over time, since payment history is the single largest factor in credit calculations.
  • Personal loans improve your credit mix by adding an installment account to what may otherwise be all credit cards, which can help your score.
  • Missing even one payment can erase months of progress and trigger a much larger score drop than the initial inquiry.
  • The total damage to your score depends on your current score, credit history, and how much you borrow relative to your income.

Why the initial drop happens and how long it lasts

The hard inquiry itself is a small part of the damage — usually 5 to 10 points. The bigger impact comes from the new account. When you open a new loan, your credit report now shows one more active account. This lowers your average account age, which accounts for about 15 percent of your score. It also increases your total debt load, which affects your credit utilization ratio (the percentage of available credit you are using). Even though a personal loan is not a credit card, lenders still factor your total monthly debt obligations into their view of your risk.

The hard inquiry itself disappears from your report after two years, though it stops affecting your score after about 12 months. The new account stays on your report for the life of the loan, plus seven years after you pay it off. However, the score impact from the new account shrinks over time as the loan ages and you build a payment history. Most people see their score stabilize within three to six months, then begin to climb as on-time payments accumulate.

How on-time payments rebuild your score

Every on-time payment on a personal loan is recorded on your credit report and counts toward your payment history. Since payment history is 35 percent of your score, consistent payments have a large effect. After 12 months of on-time payments, most people see their score recover to its pre-loan level or higher. After 24 months, the benefit becomes even more pronounced because you have demonstrated reliability over a longer period.

The benefit is especially large if your credit history is thin or spotty. A personal loan adds a new type of account to your report — an installment loan rather than a revolving credit card. This credit mix accounts for about 10 percent of your score. If you have only credit cards, adding an installment loan shows lenders you can manage different types of debt, which improves your score beyond just the on-time payment benefit.

What happens if you miss a payment

A single missed payment can drop your score by 100 points or more, erasing months of progress from on-time payments. The damage is larger for personal loans than for credit cards because installment loans are seen as more serious obligations — you are borrowing a lump sum and committing to a fixed repayment schedule, not using a flexible credit line. A missed payment stays on your report for seven years, though its impact weakens after two or three years.

If you fall behind by 30 days or more, the lender will report it to the credit bureaus. If you fall behind by 90 days or more, the lender may charge off the account (declare it uncollectible) or sell it to a debt collector. Either outcome creates a major score drop and can affect your ability to borrow for years. If you are struggling to make a payment, contact the lender before the due date — many offer hardship programs, payment deferrals, or restructuring options that do not trigger a missed payment report.

How the size of the loan affects your score

Borrowing a larger amount creates a larger initial score drop because it increases your total debt load more. A $5,000 personal loan will typically have less impact than a $25,000 loan, all else equal. However, the relationship is not linear — a loan that is too large relative to your income can also make it harder to may have access to in the first place, because lenders look at your debt-to-income ratio (your total monthly debt payments divided by your gross monthly income).

The lender's underwriting process also matters. Some lenders pull your credit report multiple times during the process process, each time creating a hard inquiry. However, multiple inquiries for the same type of credit (like personal loans) within 14 to 45 days typically count as a single inquiry for scoring purposes, so shopping around for rates does not multiply the damage. Once you accept a loan offer and the lender funds it, additional inquiries stop.

Personal loans versus credit cards and other debt

Personal loans affect your score differently than credit cards because they are installment accounts, not revolving accounts. With a credit card, you can carry a balance, pay it down, and use it again — your available credit stays the same. With a personal loan, you borrow a fixed amount, make fixed payments, and the balance goes down each month. This difference matters for credit mix, which is 10 percent of your score. If you have only credit cards, a personal loan improves your mix.

Personal loans also affect your score differently than mortgages or auto loans because they are unsecured — the lender has no collateral if you default. This makes them riskier from the lender's perspective, so the initial score impact can be slightly larger. However, the long-term benefit is similar: consistent on-time payments on any type of installment loan help your score over time.

Using a personal loan to improve your credit

Some people take out personal loans specifically to rebuild credit, often by using the loan to pay off credit card balances. This strategy can work, but only if you follow through. When you pay off credit cards with a personal loan, your credit card balances drop to zero, which improves your credit utilization ratio (the percentage of your credit limit you are using). This benefit can offset the initial score drop from the new loan. However, if you then run the credit cards back up while also making personal loan payments, you end up with more total debt and a lower score than you started with.

The other risk is that you are replacing flexible debt (credit cards you can pay down at your own pace) with fixed debt (a personal loan payment you must make every month). If your income becomes unstable, the fixed payment can be harder to manage. Before taking out a personal loan to consolidate debt, make sure the monthly payment fits your budget and that you have a plan to avoid running up the credit cards again.

Frequently Asked Questions

How much does a personal loan lower your credit score?

The initial drop is typically 10 to 50 points, depending on your current score and credit history. The hard inquiry accounts for 5 to 10 points, and the new account itself accounts for the rest. The exact amount varies by scoring model and by how much you borrow relative to your income.

How long does it take for a personal loan to stop hurting your credit?

The hard inquiry stops affecting your score after about 12 months. The new account itself continues to affect your score, but the impact shrinks over time. Most people see their score stabilize within three to six months and begin to improve after 12 months of on-time payments.

Can a personal loan help my credit score go up?

Yes, but only if you make every payment on time. After 12 to 24 months of on-time payments, most people see their score recover to its pre-loan level or higher. The benefit is larger if you use the loan to pay off credit cards, because it improves your credit utilization ratio.

Does paying off a personal loan early hurt your credit?

Paying off early does not hurt your score, but it does remove the ongoing benefit of on-time payments. Once the loan is paid off, you lose the positive effect of that payment history going forward. However, the paid-off loan stays on your report for seven years and continues to show that you managed the debt responsibly.

Will shopping around for personal loan rates hurt my credit?

Multiple hard inquiries for personal loans within 14 to 45 days typically count as a single inquiry for scoring purposes. This means you can shop around with different lenders without multiplying the damage. Once you accept an offer and the loan is funded, additional inquiries stop.