When applying for personal loans, lenders will review your application along with your credit profile and score to see what kind of risk you might be as a potential borrower. By looking at your credit history and other details they are able to evaluate whether allowing you to borrow a personal loan from them makes sense as a lender.
Tips for Applying for Personal Loans
Knowing some basics to know before applying for personal loans can often make the difference between being approved or rejected and provide some benefits. Always start with reviewing any eligibility requirements for a personal loan. You should also know your credit score beforehand. This can also be helpful as if your score were to be close to the point where you could boost your score by a few points to get a better interest rate, it can be worth it to focus on this if the funds aren’t for an immediate need. Sometimes the better rate can save you a considerable amount in interest and the overall cost of borrowing a personal loan or installment loan.
How Personal Loans Can Help Your Credit Score
If you borrow a personal loan and make all your payments for the loan on time, these payments are reported to the credit bureaus and can progressively help you improve your credit score. Your payment history is one of the most important parts of your credit score and making the scheduled payments of your personal loan would be strongly advised.
READ MORE: What to Know Before You Get a Personal Loan
How Does Applying Impact My Credit Score
When a credit check occurs, there are two types, a hard and a soft check. A soft check does not impact your credit score, whereas a hard inquiry (also known as hard credit check) would affect your credit score.
The credit check provides your credit score, along with insight on your history, such as past or current loans, lines of credit, along with payment history, any collections accounts, liens and similar. The purpose is to help lenders with borrowing decisions, and seeing how much credit an individual might be juggling along with their creditworthiness, ability to make payments, and likelihood that they would.
How to Minimize the Impact to Credit Score
When you are comparing personal loans, the credit bureau algorithms recognize this and allow a window where applying to several will not be incrementally worse. This means that for a period of time, usually 2 weeks, that you are able to compare loan options and apply to several and it would have the same effect as applying to one.
So if you are considering a personal loan and doing some comparisons, it’s a good idea to do so within that 2 week window to minimize any impact it might have on your credit score. You would likely see a dip in your score from comparing and applying, but it is likely to return to where it was within a few weeks. Any hard inquiries usually only affect your credit score for about a year, but can stay on your credit report for up to two years.
How Soft and Hard Inquiries are Different
A soft inquiry does not affect your credit score, while a hard inquiry does. Hard inquiries occur when you apply for personal loans, lines of credit, mortgages or credit cards. They also happen when you request an increase to your credit limit, and utility or apartment rental applications.
|Soft Inquiry||Hard Inquiry|
|Does not affect your credit score||Will affect your credit score|
|Done by creditors to provide pre approved offers||Done by creditors and lenders when applying for credit or a loan|
|Can be checked without your consent||Requires written consent|
While a hard inquiry can temporarily lower your credit score, too many hard inquiries within the same period can have a much bigger impact. As previously mentioned, there is a window of about 2 weeks (potentially longer with mortgages) where credit bureaus like Equifax and Transunion expect a few hard inquiries while comparing loan options. Working within this window helps to minimize potential impact to your credit score.
Your credit score has a connection to what personal loans you might qualify for, along with what sort of interest rate you might be offered. The higher the credit score, the better the interest rate you might be offered for personal loans.
You should always monitor your credit score and keep trying to improve it, because it’s very possible you will rely on it again for a personal loan, mortgage, credit card or something else. Since it takes time to improve, it’s important to manage, so that you have the best score possible and can get the best rate that could be available to you in future.