A personal loan will lower your credit score in the short term, then help it recover if you make on-time payments

When you take out a personal loan, three things happen to your credit score almost immediately. First, the lender runs a hard inquiry — a formal check of your credit report — which typically drops your score by a few points for a few months. Second, a new account appears on your report, which lowers your average account age. Third, your total available credit increases, which usually helps. The net effect is usually a dip of 10 to 50 points in the first 30 days, depending on your starting score and credit mix.

After that initial drop, your score begins to recover if you make payments on time. Each on-time payment is recorded on your report and shows lenders you can manage debt responsibly. Over 6 to 12 months of consistent payments, most people see their score return to its pre-loan level or higher. The longer you keep the account open and make payments, the more it helps your score — personal loans can actually improve your credit profile over time because they demonstrate you can handle different types of debt.

Key Takeaways

  • A hard inquiry and new account lower your score by 10 to 50 points immediately, but this effect fades within a few months.
  • On-time payments rebuild your score faster than the initial dip, and most people recover their starting score within 6 to 12 months.
  • Missing a payment or paying late can drop your score by 100 points or more and stay on your report for seven years.
  • Paying off the loan early does not hurt your score, but closing the account afterward removes a positive payment history from your report.
  • Personal loans help your score more than credit cards over time because they show you can manage installment debt, not just revolving credit.

Why your score drops when you first borrow

The hard inquiry is the smallest part of the initial drop. Credit bureaus treat a hard inquiry as a sign you are seeking new credit, which suggests you may be in financial stress. This inquiry stays on your report for two years but stops affecting your score after about three months. If you shop for loans within 14 to 45 days (depending on which scoring model is used), multiple inquiries count as one, so rate-shopping does not multiply the damage.

The new account itself has a bigger effect. Your credit score is partly based on your average age of accounts. When you add a brand-new account, it pulls down that average, which can lower your score. At the same time, the loan increases your total credit limit — the sum of all credit available to you — which usually helps your score because it lowers your credit utilization ratio (the percentage of available credit you are actually using). For most people, the utilization benefit does not fully offset the new-account penalty at first, so the net effect is negative.

How on-time payments rebuild your score

Payment history is the single largest factor in your credit score — it accounts for 35 percent of most scoring models. Every on-time payment on your personal loan is recorded and reported to the credit bureaus. After your first few on-time payments, the bureaus begin to see the account as a positive part of your history rather than a new risk. The longer the account ages and the more payments you make, the more it helps your score.

The recovery timeline varies depending on your starting score and credit mix. Someone with a score of 750 before borrowing might recover within 3 to 6 months. Someone starting at 650 might take 9 to 12 months. The lower your starting score, the more each on-time payment helps, because payment history carries more weight when you have less of it. By the time you have made 12 to 18 on-time payments, the personal loan is usually a net positive for your score.

What happens if you miss a payment

A single late payment — even one day late — can drop your score by 100 points or more, depending on how late it is and your starting score. A payment 30 days late is reported to the bureaus and stays on your report for seven years. A payment 60 or 90 days late causes even more damage and may trigger collection activity or a lawsuit. The damage from a late payment is much larger than the initial dip from opening the account, and it takes much longer to recover from.

If you are struggling to make a payment, contact your lender before the due date. Many lenders offer deferment or forbearance — temporary pauses or reductions in payments — that do not count as late payments. Some lenders also allow you to change your payment date if it does not align with your paycheck. These options do not appear on your credit report as negative marks.

Paying off the loan early and closing the account

Paying off a personal loan early does not hurt your score. In fact, it shows you can manage debt responsibly. However, closing the account after you pay it off can have a small negative effect. When you close an account, you remove it from your active credit mix, which can lower your score slightly. More importantly, you remove the positive payment history from the active accounts section of your report — it stays on your report for ten years, but it stops being weighted as heavily.

If you want to maximize the benefit of a personal loan to your credit score, keep the account open after you pay it off. There is no fee for keeping a paid-off personal loan account open, and it continues to show lenders that you have a history of on-time payments. Some people keep paid-off loans open for years for this reason.

How personal loans compare to credit cards for your score

Personal loans and credit cards affect your score differently because they are different types of credit. Credit cards are revolving credit — you can borrow, repay, and borrow again from the same limit. Personal loans are installment credit — you borrow a fixed amount and pay it back in equal monthly payments. Credit scoring models reward you for managing both types of credit, so having a personal loan and a credit card shows more credit diversity than having only one type.

Over time, a personal loan usually helps your score more than a credit card does. Credit cards are easy to max out, which hurts your utilization ratio. Personal loans have fixed payments that are easier to manage, so they are less likely to become a problem. If you use a personal loan to pay off credit card debt, you are replacing high-utilization revolving credit with low-utilization installment credit, which is a net positive for your score — even accounting for the initial dip from opening the loan.

How long the effects last on your credit report

A hard inquiry stays on your report for two years but stops affecting your score after three months. A new account stays on your report indefinitely as long as the account is open or in good standing. Once you close the account, it stays on your report for ten years. A late payment stays on your report for seven years from the date it was first reported as late. A paid-off loan with no late payments is one of the best things you can have on your report because it shows a long history of on-time payments.

This means the credit score impact of a personal loan is temporary, but the benefit is long-lasting. The initial 10 to 50 point dip fades within months, but the positive payment history can help your score for years.

Frequently Asked Questions

How much will my score drop when I take out a personal loan?

Most people see a drop of 10 to 50 points in the first 30 days. The exact amount depends on your starting score, credit mix, and how much credit you already have. People with lower starting scores often see smaller drops because the new account has less relative impact. This initial drop is temporary and usually recovers within 3 to 6 months of on-time payments.

Can I improve my score while paying off a personal loan?

Yes. On-time payments on the personal loan improve your score, and you can also improve it by paying down credit card balances or keeping credit card utilization low. The combination of a personal loan with on-time payments and low credit card utilization usually produces faster score recovery than either alone.

Does paying off a personal loan early hurt my score?

Paying off early does not hurt your score. However, closing the account after you pay it off can cause a small dip because you remove an active account from your report. To avoid this, keep the account open after you pay it off — there is no cost to do so, and it continues to help your score.

Will a personal loan help my score if I have bad credit?

Yes, but it takes longer. If your score is below 600, on-time payments on a personal loan can help significantly because payment history carries more weight when you have less of it. However, you may have trouble getting approved for a personal loan with bad credit, or you may face higher interest rates. A secured personal loan or a credit-builder loan may be easier to obtain.

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

A hard inquiry happens when you apply for credit and the lender checks your full credit report. It affects your score and stays on your report for two years. A soft inquiry happens when you check your own credit or when a company pre-screens you for an offer. Soft inquiries do not affect your score and do not appear on reports that lenders see.