The number of points a loan may affect your credit score depends on how a borrower handles their loan. Depending on the situation, a borrower may see their credit score go up or down because of a loan.
To start, when you fill out a loan application, the lender will make a hard credit inquiry into your finances. Lenders request hard credit pulls to check on the financial history of a borrower and to confirm they are not currently going through the bankruptcy process. Hard credit checks are kept track of and may affect your credit score by up to five points. This is why it may not be a good idea to fill out many loan applications within a short period of time.
After receiving approval and accessing loan funds, borrowers must then pay back their balance. Borrowers who make payments on time and eventually clear their loan balance may see an improvement in their credit score the next time they pull a report. Alternatively, borrowers who miss payments or fail to pay back their Loan balance may see a significant drop in their credit score. If the situation worsens and the borrower ends up defaulting on their loan, they may suffer from the negative effects of this default for up to seven years.
To avoid damage to your credit score when paying back a personal loan, make sure you feel comfortable with your repayment terms. Make sure you talk with your lender and discuss your financial situation, so they can pair you with a payback schedule that works for your personal budget.
Furthermore, if down the line you find your monthly payments too much to handle, talk to your lender and see what they can do for you. They may be able to lower your payments or help you refinance altogether.
There are also certain loan types you may want to stay away from if you are looking to maintain or build your credit. For example, payday loans and title loans usually cause borrowers to end up in more debt. Other types of loans, like personal installment loans, were designed to help bad credit borrowers improve their overall financial situation.
