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Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: fizkes/Shutterstock September 12, 2022 Hanneh Bareham specializes in everything related to student loans and helping you finance your next educational endeavor. She aims to help others reach their collegiate and financial goals through making student loans easier to understand. Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate logo Editorial integrity
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Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. When you apply for debt products, your credit score may dip slightly. Personal loans are no exception to the rule — applying in hopes of getting approved for the funds you need can ding your credit score. But there’s an upside: making timely monthly payments can also mean good news for your credit score over time. Your payment history, which is the largest component of your credit score, will improve. Your credit utilization will decrease, which also benefits your overall credit health. How loan applications impact your credit
When you , lenders will assess your credit score and history to determine your credit risk or creditworthiness. To do this, lenders run a . When they run this check, they’re looking for indicators of financial health, like low credit balances and a good . A hard credit check will temporarily lower your credit score by five points or less. Your score will likely drop less than that if you have excellent credit. Your credit score will typically recover within a few months, but the hard credit check will stay on your credit report for two years. Since applying for a personal loan requires a hard credit check, it is a good idea to be as prepared as possible. You are required to submit when you apply for a personal loan. These typically include proof of identity, employer and income verification and proof of address. How personal loans could help your credit
Under the correct circumstances and when used responsibly, a personal loan can in a few ways: Better credit mix: Adding various types of credit to your portfolio helps keep your credit score high as long as you stay on top of payments. It is generally a good idea to have a mix of installment loans and revolving credit. Debt consolidation: If you use a , you can generally take advantage of lower interest rates than you’d get with credit cards. With a lower interest rate, you may be able to pay down outstanding debt faster, which will improve your credit score. Payment history: A personal loan can help establish a positive payment history when made in full and on time. Positive payment history makes up , the largest category in determining your score. Reduced credit utilization ratio: A personal loan does not affect your credit utilization ratio, but using that loan to pay off revolving credit card debt could lower your ratio. You generally want to keep your credit utilization below 30 percent. How personal loans could hurt your credit
While personal loans could help you improve your credit score, they can also hurt your score if you’re not prepared to pay them off. Here are some risks you need to consider before applying for a personal loan: Hard inquiry on your credit: Due to the hard credit check, you will likely see a short-term drop in your credit score when you formally apply for the loan. While this may not be detrimental to your long-term credit score, it could cause some harm to your credit if you apply for multiple loans in a short time. Monthly payments: Before applying for a loan, you should analyze your monthly expenses to see if it is within your budget to add another monthly payment to your expenses. More debt: Every time you borrow money, you increase your chances of falling into debt— especially if you continue to rack up credit card balances while paying off your loan. While not all debt is necessarily negative, it’s important to analyze your current financial situation before applying to determine if a loan is a move in the right direction. Potentially high interest rates and fees: Depending on your creditworthiness, you could get stuck with a considerably high interest rate and fees. The higher the interest rate, the longer you may be paying off the loan. If you can’t afford those rates in the long term, you risk falling behind on payments and damaging your credit score. Here are some of the events that could occur during the life of your loan that would hurt your credit score. Event on credit report Late payments 7 years Debt collections Up to 7 years Chapter 13 bankruptcy 7 years Chapter 7 bankruptcy 10 years As illustrated above, missing payments, defaulting on loans and bankruptcy all stay on your credit report for approximately 7 years, if not more. When you miss a payment, it is sent to collections. Your credit score could drop up to 90 to 110 points. If you do not make the late payment within 30 days, the lender can report the defaulted payment to the credit bureau. While some lenders wait up to 60 days, making the payment as soon as possible is best. What to consider before taking out a personal loan
Before taking out a loan, consider the benefits and drawbacks of adding another monthly bill to your budget. A few things to think about are: Reason for the loan: Are you interested in a personal loan to pay for a vacation or a luxury item? If this is the case, consider whether it makes more sense to save up for the item than apply for a loan. Depending on the purpose of your loan, you may also want to consider other types of loans. If you are taking out a loan for home improvement purposes, a home equity loan could have better rates and fit your needs well. Your credit score and history: Do you have a good credit score and healthy habits with your credit? If not, you can take steps to improve your credit score by restoring some of those bad habits. Your debt-to-income ratio: Your debt-to-income ratio, or DTI, measures your monthly debt relative to your monthly income. Generally, the higher the DTI ratio, the less likely you will qualify for a loan. To calculate your DTI ratio, you can use Bankrate’s All of your options: Shopping around for the for you is one of the most important steps to take. Each lender offers different rates, fees and conditions. The best way to find out how much you’d be paying every month is to explore all of your options. The bottom line
Personal loans can be a great tool that can help you improve your credit score, consolidate credit card debt or . However, knowing how applying for a loan can affect your credit score is important. While you may experience a short-term dip when you submit your application, you could improve your credit score over the long run by making timely payments and using your loan funds to pay down existing debt. Learn more
SHARE: Hanneh Bareham specializes in everything related to student loans and helping you finance your next educational endeavor. She aims to help others reach their collegiate and financial goals through making student loans easier to understand. Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information.