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

When you take out a personal loan, three things happen to your credit when ready. First, the lender runs a hard inquiry — a formal check of your credit report that typically drops your score by a few points. Second, a new account appears on your report, which lowers your average account age. Third, your total available credit increases, which usually helps your score. The net effect is usually a drop of 5 to 10 points in the first month, though this varies by lender and your existing credit profile.

The longer-term picture is different. If you make every payment on time, the loan builds a record of on-time payment history — the single largest factor in your credit score. After six months to a year of consistent payments, most borrowers see their score recover and then climb higher than it was before they borrowed. If you miss payments, the damage is much worse and lasts much longer.

Key Takeaways

  • A hard inquiry and new account lower your score by a few points when ready, but this effect fades within a few months.
  • On-time payments on a personal loan build payment history, which is the largest factor in your credit score and helps it grow over time.
  • Missing even one payment can damage your score significantly and stay on your report for seven years.
  • Personal loans can actually improve your credit faster than credit cards if you need to show a mix of different types of credit accounts.

Why the initial drop happens

The score drop you see right after borrowing comes from two separate events. When you submit a loan process, the lender checks your credit report directly — this is the hard inquiry. Credit scoring models treat hard inquiries as a signal that you are seeking new debt, so they penalize the score slightly. A single hard inquiry typically costs 5 to 10 points, though the exact amount depends on your credit history and which scoring model is used.

At the same time, the new loan account itself appears on your report. Credit scores reward you for having a long history with accounts, so a brand-new account lowers your average account age. This is a temporary effect — as the account ages, this penalty shrinks. Within a few months, the hard inquiry disappears from your report entirely, and the new account stops dragging down your age average as much.

The good news is that your credit limit or available credit usually increases when you borrow. If you borrowed $10,000, you now have $10,000 more credit available than before. Credit scores reward you for using a small percentage of your available credit, so this increase can offset some of the damage from the hard inquiry and new account.

How on-time payments rebuild your score

Payment history makes up about 35 percent of your credit score — more than any other single factor. When you make your first payment on time, that payment gets reported to the credit bureaus. When you make your second payment on time, the bureaus see a pattern. After six months of on-time payments, most scoring models begin to reward you noticeably. After a year, the boost is usually substantial.

A personal loan also adds credit mix to your report. Credit scoring models like to see that you can handle different types of credit — revolving credit like credit cards, and installment credit like loans. If your report contains only credit cards, adding a personal loan shows lenders that you can manage different payment structures. This can raise your score by 10 to 20 points over time, depending on your existing mix.

The timeline matters. You will not see a major score improvement after one or two payments. Most borrowers see meaningful recovery within three to six months, and substantial improvement within a year. The longer you make on-time payments, the more powerful the effect becomes.

What happens if you miss a payment

A single missed payment can drop your score by 100 points or more, depending on how late the payment is and your credit history. A payment that is 30 days late is reported to the credit bureaus and damages your score. A payment that is 60 days late causes more damage. A payment that is 90 days late or more causes severe damage and may trigger collection efforts.

Missed payments stay on your credit report for seven years from the date you first missed the payment. This means a single late payment can affect your ability to borrow for years. If you are considering a personal loan, make sure you can afford the monthly payment before you borrow. If your financial situation changes after you borrow, contact your lender when ready — many lenders offer hardship programs or payment deferrals that are far less damaging than a missed payment.

Personal loans versus credit cards for credit building

Personal loans and credit cards affect your credit differently. A credit card is revolving credit — you can borrow, repay, and borrow again from the same account. A personal loan is installment credit — you borrow a fixed amount and pay it back in equal monthly payments over a set period. Both types of credit help your score, but they work in different ways.

Credit cards are easier to damage your score with, because your credit utilization ratio — the percentage of your credit limit you are using — affects your score every month. If you borrow $5,000 on a $10,000 credit card limit, you are using 50 percent of your available credit, which hurts your score. With a personal loan, there is no utilization ratio. You borrowed $10,000, and your score does not change based on how much of that you have paid back.

Personal loans can rebuild your score faster if you have damaged credit or limited credit history. Because the payment is fixed and required every month, on-time payments build a strong payment history quickly. Credit cards require discipline to use responsibly — if you carry a high balance, the utilization ratio can offset the benefit of on-time payments.

How to minimize damage to your credit

If you are concerned about the short-term score drop, you can take steps to reduce it. First, do not explore to multiple lenders in a short period. Each process triggers a hard inquiry, and multiple inquiries in a short time can drop your score significantly. Most lenders allow you to check rates with a soft inquiry first — this does not affect your score. Use soft inquiries to compare rates, then explore to one lender.

Second, do not close other credit accounts after you borrow. Closing an account reduces your total available credit and can raise your utilization ratio on remaining cards. If you have an old credit card with a zero balance, leave it open. The account history helps your score, and the available credit helps your utilization ratio.

Third, make your first payment on time, and every payment after that. The initial score drop is temporary and small compared to the damage from a missed payment. If you make on-time payments consistently, your score will recover and grow.

How long the credit impact lasts

The hard inquiry disappears from your credit report after two years, though its effect on your score fades much faster — usually within three to six months. The new account stays on your report indefinitely, but it stops being "new" after about a year, and the age penalty shrinks significantly.

The on-time payment history stays on your report for as long as the account is open and for seven years after you close it. This is the most valuable part of the loan for your credit score. If you pay off the loan early, the account will eventually close, but the payment history remains and continues to help your score.

A missed payment stays on your report for seven years from the date you first missed it. This is why the initial score drop is worth it — the temporary damage from the hard inquiry and new account is small compared to the long-term benefit of building on-time payment history, and vastly smaller than the damage from a missed payment.

Frequently Asked Questions

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

Most borrowers see a drop of 5 to 10 points from the hard inquiry and new account. The exact amount depends on your credit history, how many accounts you already have, and which scoring model is used. This drop is temporary — the hard inquiry effect fades within a few months, and the new account stops dragging down your score as it ages.

Can I improve my credit score by taking out a personal loan?

Yes, but only if you make on-time payments. The initial drop is small and temporary. After six months to a year of consistent on-time payments, most borrowers see their score recover and then climb higher than before they borrowed. The loan adds payment history and credit mix, both of which help your score over time.

What if I pay off the personal loan early?

Paying off early does not hurt your score, and it saves you interest. The account will close, but the payment history stays on your report for seven years and continues to help your score. Some lenders charge prepayment penalties, so check your loan agreement before you pay early.

Will a personal loan hurt my chances of getting approved for a mortgage?

A personal loan can actually help your mortgage process if you have on-time payments on it. Lenders like to see that you can manage different types of credit. However, if you have just taken out the loan and your score is still recovering, or if you have missed payments, it can hurt your process. The timing and your payment history matter more than the loan itself.

How many hard inquiries is too many?

Multiple hard inquiries in a short period can drop your score significantly. Most scoring models treat inquiries within 14 to 45 days as a single inquiry if they are for the same type of credit, so shopping around for rates within a few weeks is usually safe. explore to many different lenders over several months, or explore for different types of credit at once, can cause more damage.