Personal loans are usually unsecured loans i.e., you do not have to pledge any collateral against these loans. Also, the usage of personal loans is not restricted. Unlike home loans or car loans, personal loans can be used to meet any of your legitimate financial needs.

But do you know the impact of personal loans on credit scores? As and when you apply for a personal loan, it gets reflected on your credit profile.

Read on to know how personal loans affect credit scores. 

What is a Credit Score?

A credit score is a 3-digit numerical representation of an individual’s creditworthiness based on their credit history. It is used by lenders to assess the risk of lending money to a person. A higher credit score indicates lower risk, making it easier to obtain loans and credit cards. Factors such as payment history, length of credit history, credit inquiry, credit utilisation, and credit mix influence the credit score. 

In India, the range for credit score is 300-900. Any score above 750 is considered quite a good score. Such a healthy credit score helps you in getting financial assistance like loans and mortgages. This is because a high credit score shows your financial integrity and repayment capacity, which makes you a credible borrower.

What is the Relation Between Credit Score and Personal Loan?

The simple answer to the question of do personal loans affect credit scores is yes. However, what will be the impact of a personal loan on your credit score is determined by your repayment tenure and habits. It is a common myth that applying for a personal loan will reduce your credit score. The overall credit score may get reduced temporarily because of the increased debt, but several such personal loans do not affect your credit score adversely. Instead, they help improve the score. As you start making regular payments and if you do not default on your repayment, your credit score will improve.

What is the Impact of Personal Loans on Credit Scores?

To understand how a personal loan affects credit score, let us see what is the impact of taking a personal loan on various elements of credit score –

Payment history

If you make timely payments on your personal loan, it will have a positive effect on your credit score. Regular and timely EMI would improve your credit score. It shows healthy financial habits and is indicative of your creditworthiness.
Length of credit history – Taking a personal loan creates a diversified credit history, especially if you had a record of taking and repaying credit. If you have a good credit history, an additional credit tenure extends the length of your credit history. If it is a healthy financial record, then having a long credit history adds up to your credit score.

Credit inquiry

When you apply for a personal loan, the lender carries out a deep inquiry on your credit report. While a single inquiry does not have much impact, multiple inquiries, that too within a short period can lower your score.

While this reduction in the credit score is temporary, make sure you avoid applying for multiple loans simultaneously. Multiple personal loan applications can lower your credit score significantly.

Credit utilisation

If you take a personal loan, your overall debt will increase. This can reduce your credit score. However, this reduction in credit score can be temporary and very easily changed if you start making regular and timely loan EMIs without defaulting.

Also, it is best recommended to keep your credit utilisation ratio lower than 30%. If after taking the personal loan, your credit utilisation ratio is well under the limit of 30%, it won’t have any negative impact on your credit score.

Credit mix

Having a balanced mix of credit, which also includes a personal loan can improve your credit score. A diverse mix of credit indicates that you are well adept at managing different types of credit, responsibly.

Get Instant Personal Loan with MobiKwik Without Hampering Your Credit Score

While depending on factors like your current or new debt, your credit mix, your credit history, etc. availing of a personal loan may improve your credit score or may cause a decrease in the score. 

However, there are some digital wallets and non-banking financial institutions like MobiKwik, which can help you get an instant personal loan, and yet you may not have to compromise on your credit score, even temporarily. 

With its ZIP EMI feature, MobiKwik offers personal loans that do not affect your credit score negatively. This is because the credit line is offered primarily based on your current credit score. Based on your credit score, you can get an instant personal loan of up to Rs 2,00,00 with MobiKwik. 

It is clear from the above discussion that the impact of personal loans on credit scores depends on how you manage your personal loan repayment and other credit payments. There is no definite positive or negative impact.

There are several factors in play the combination of which will determine what will be the final impact of a personal loan on credit score.