A personal loan does affect your credit. Borrowing money will alter your credit because the three major credit bureaus collect and report your financial activity.
Applying for a personal loan requires a hard credit check. Many lenders make both soft and hard credit inquiries. Soft credit checks do not affect your credit, but hard credit checks do. A hard credit check allows the lender to view your credit score and make a qualifying decision. Although this change is temporary, hard inquiries can deduct as much as five points from your credit score.
Once you get a personal loan, your financial activity will continue to affect your credit until the account gets closed. Five key factors affect credit scores: payment history, total debt, length of credit history, new inquiries, and types of accounts. Payment history accounts for 35% of your score, which makes it the most influential criterion for most credit scoring models.
Paying your personal loan on time each month can help you increase your credit over time! An excellent payment history and credit score can help you obtain better loan offers in the future. Lenders are often quick to offer good credit borrowers low rates, long repayment terms, and higher loan amounts.
That being said, missed or late payments can negatively impact your credit long-term. After a borrower misses a loan payment, the personal loan lender can report the infraction to one of the three major credit bureaus. Late payments will remain on a credit report for up to seven years from the date of delinquency. Although the effects of negative information on a credit report will lessen as the years go by. Once seven years pass, the account will fall off your report!
If you experience financial issues during repayment, ensure you speak with your lender. Multiple missed payments can result in delinquency and then default. Loan default means the borrower has failed to abide by the repayment terms of the financial contract. However, personal loans are affordable for most people. If you have trouble with payments, ask about a refinance or an extension! A payment extension allows you to skip at least one monthly payment without penalty.