Yes, taking out a loan can temporarily hurt your credit due to a hard inquiry and new debt, but managing it responsibly with on-time payments can significantly improve your score over time by building payment history and diversifying your credit mix. The key is whether you use the loan wisely, like consolidating high-interest credit card debt (which lowers utilization) or just adding more debt, and if you make timely payments.
While a hard inquiry for a personal loan can trigger your credit scores to drop slightly (usually less than five points), your scores are likely to recover within a few months to one year—and the impact will decrease with time as you continue to make timely bill payments.
Hard credit pulls
Before offering most loans, including a personal loan, you can expect a lender to closely examine your credit report. This “hard credit pull” process may temporarily lower your credit score.
It can make a dent in your credit score, which should be short-term as long as you pay it back in line with the agreement. But, if you're also looking for other types of credit (like a credit card or car finance , for example), you might find it's harder to get accepted.
The 2-2-2 credit rule is a guideline for building strong credit, suggesting you should have two active credit accounts (like cards or loans) for at least two years, with consistent on-time payments for those two years, often with a minimum credit limit of $2,000 per account, to demonstrate financial responsibility to lenders, especially for mortgages. It's a benchmark to show you can handle credit well over time, reducing lender risk and improving approval odds for major loans.
What are the risks of taking out a personal loan?
You can pay off a personal loan early. But before you do, make sure you ask about prepayment penalties and think through alternatives like building up savings or paying off high-interest credit cards. You can pay off a personal loan early, but it may not be your best option.
Bottom line. Personal loans have a lot of benefits for borrowers who need money quickly and prefer the security of a fixed rate and payment for the life of the loan. However, they can be expensive if you have bad credit and could quickly become a financial burden if your income isn't predictable.
Personal loans can boost your credit score by adding to your credit mix and reporting a positive payment history. There are some risks associated with applying for a personal loan, including hard credit inquiries, additional debt and lender fees.
Paying off a loan early is generally good for your finances (saves interest) and long-term credit (reduces debt), but it can cause a temporary, minor dip in your credit score because it shortens your credit history and removes a credit account, affecting your "credit mix" and "length of credit history," but this usually recovers quickly, especially if you maintain good habits like paying credit cards on time.
Yes, you can likely get a $50,000 loan with a 700 credit score, as this falls into the "good" credit range (670-739) that unlocks better rates, but approval also hinges on your income, debt-to-income (DTI) ratio (ideally below 36%), and overall credit history, with lenders looking for stability and repayment ability, so prequalifying with multiple lenders helps compare terms.
You applied for a new loan, which resulted in a hard inquiry. You've increased your credit utilization, perhaps by maxing out your credit cards. Often, a sudden 40-point decrease in your credit score is the result of two or more of these actions happening all at once or close together.
If you're already struggling to afford your existing monthly payments, now is not the time to take on additional debt. While it's tempting to use a personal loan to help pay off high-interest debt such as credit cards, it still comes with the risk that your monthly payments will remain unaffordable.
You can pay off and close your loan early, before the end of the original agreed term. To make sure you're paying the right amount, including any loan interest, you'll need an early settlement quote. If you are within your 14 day right of withdrawal period you can call us to cancel your loan.
Generally, personal loan borrowers do not owe taxes on a personal loan unless that loan is forgiven or cancelled before paid back in full. That is because while the IRS usually requires taxes to be paid on money you receive, when you take a personal loan, the loan amount is usually not considered to be earned income.
With a 700 credit score (considered "Good"), you're well-positioned to get approved for most major loans like mortgages, auto loans, and personal loans with more competitive interest rates and terms than someone with a lower score, plus you'll qualify for better rewards credit cards and may even see lower insurance premiums. You can access a wide range of financial products, but to get the best rates, scores above 740-760 are often needed.