How does a personal loan affect your credit score? The answer depends on how you apply for and manage one. Used responsibly, a personal loan can be a helpful financial tool to fund a large purchase or consolidate high-interest debt. But used carelessly, a personal loan can become a burdensome debt.
It’s hard to predict exactly how personal loans affect any one person’s credit score because it’s affected by so many factors. For example, your financial behavior or situation can affect your credit, plus different credit scoring models measure credit scores differently. So, what’s the relationship status of a personal loan and your credit score? It’s complicated — but with some care and attention, the relationship can be a healthy one.
What Is a Credit Score?
A credit score is a three-digit number based on a scoring model that is used to predict your borrowing behavior. In other words, it predicts the likelihood you are to pay your debts responsibly. The scoring model is based on activity from your credit history, such as your history of debt payments, type of open credit accounts, any negative marks such as bankruptcy, and other factors.
Most scoring models range from 300 to 850 — the higher your score, the more you’re likely to be responsible with credit. Lenders see a higher score as a good credit score, i.e., someone who is more likely to pay back loans on time and less of a risk. In effect, the higher your score, the more likely you will receive more favorable terms on a loan.
What Is a Personal Loan?
A personal loan is a type of loan for which borrowers receive a one-time, lump-sum amount from a bank, credit union, or online lender. The loan is then paid back in monthly installments for the agreed-upon term until it’s fully paid off. The loan proceeds can be used for almost any purpose, though borrowers may be restricted from using the money for educational or business uses.
There are two types of personal loans — secured and unsecured. A secured loan requires the borrower to put up some type of collateral, such as a vehicle or a savings account to guarantee the loan. If the borrower defaults, the lender has the right to seize the collateral. An unsecured loan doesn’t require collateral.
(Learn more: Personal Loan Calculator)
Personal Loans and Credit Scores
Whether you’re applying for or paying back a personal loan, your financial behavior can affect your credit score.
Can a Personal Loan Help Your Credit Score?
Having a personal loan doesn’t necessarily build your credit score. Instead, the way you manage your debts can affect your score. Lenders typically report payment history to credit reporting agencies, which might help your score if you have a history of on-time payments.
For instance, making consistent, on-time payments shows lenders you’re a responsible borrower. This activity will be reported to the credit bureaus, which may in turn reassess your score.
Since your payment history is one of the biggest factors affecting your credit score — it could affect up to 35% of your score — making on-time payments can positively affect your credit. The opposite can happen if you’re late or miss a loan payment.
Can a Personal Loan Lower Your Credit Score?
Personal loans aren’t typically an automatic cause for a significant credit score decrease. But factors related to applying for and managing a personal loan may negatively affect your credit score, including:
- When you submit a loan application, the lender will make a hard credit pull of your credit report to assess your creditworthiness. If there are multiple hard inquiries into your report, your credit score may suffer because lenders may interpret this as multiple loans being taken out.
- A hard credit inquiry may negatively impact your credit score and can remain on your credit report for up to two years.
- Regularly making late payments or missing payments altogether.
- Using a high percentage of your available credit.
Multiple hard inquiries into your credit report made in a short time period, generally within 14 to 45 days, will only be reported once, as it’s a sign of rate shopping, not taking out multiple loans.
Checking your rate with lenders who conduct soft inquiries during a loan prequalification process is one way to compare rates without your credit score being affected. When you decide which lender is your best choice, you can then submit one application.
What Credit Score Do You Need for a Personal Loan?
Credit requirements for personal loan applications vary between lenders. In general, you’ll need to have sufficient credit history and meet the minimum score requirements set by the lender. Some lenders may approve a personal loan for an applicant with a poor credit score (a FICO® score of less than 580), but their interest rate and term may not be as favorable as for an applicant with a very good credit score (a FICO score of at least 740).
Monitoring Your Credit Score
Your credit score can be a factor in many financial areas of your life, not just loans and credit accounts, including:
- Potential landlords may check your credit for past bankruptcies or foreclosures.
- Insurance companies may use credit-based scoring as part of their rate determination.
- Utility companies may check your credit report for payment history to determine whether to charge a deposit before connecting the service.
Monitoring your credit score allows you to keep track of factors that may raise or lower that number.
There are different ways you can check your credit score. Many credit card issuers offer this service for free. You can also request a copy of your credit report from the three major credit reporting agencies at AnnualCreditReport.com. Though you won’t see your score, you will be able to see what factors may affect it.
Applying for a Personal Loan
Here are some typical requirements lenders ask for when applying for a personal loan:
- The purpose of the loan.
- Desired loan amount and term.
- Proof of income (such as your employer name, pay stubs, or tax returns).
- Personal details like your name, address, and Social Security number.
Some lenders may ask for additional documentation, such as a copy of your utility bill or information about current loans. If the lender approves your loan, you’ll be asked to supply bank account details to receive the loan proceeds.
Can You Get a Personal Loan With Bad Credit?
There are lenders willing to lend to borrowers who have bad credit. However, compared to people who have high credit scores, you may find that you may not be able to choose from as many lenders and possibly have to pay higher interest rates. Waiting to apply for a personal loan until you can build your credit score may result in more favorable loan terms.
The Takeaway
As long as you’re financially responsible by making regular, on-time payments, keeping your debt to a manageable level, and limiting the number of hard inquiries to your credit report, you probably won’t see much of an affect on your credit score merely by taking out a personal loan.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Personal Loan
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Engine by MoneyLion. If you submit a loan inquiry, SoFi will deliver your information to Engine by MoneyLion, and Engine by MoneyLion will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Engine by MoneyLion, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Engine’s Licenses and Disclosures, Terms of Service, and Privacy Policy.Personal loan offers provided to customers on Lantern do not exceed 35.99% APR. An example of total amount paid on a personal loan of $10,000 for a term of 36 months at a rate of 10% would be equivalent to $11,616.12 over the 36 month life of the loan.
Student Loan RefinanceSoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Engine by MoneyLion. If you submit a loan inquiry, SoFi will deliver your information to Engine by MoneyLion, and Engine by MoneyLion will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Engine by MoneyLion, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Engine’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
NOTICE: The debt ceiling legislation passed on June 2, 2023, codifies into law that federal student loan borrowers will be reentering repayment. The US Department of Education or your student loan servicer, or lender if you have FFEL loans, will notify you directly when your payments will resume For more information, please go to https://docs.house.gov/billsthisweek/20230529/BILLS-118hrPIH-fiscalresponsibility.pdf https://studentaid.gov/announcements-events/covid-19
If you are a federal student loan borrower considering refinancing, you should take into account the new income-driven payment plan, SAVE, which replaces REPAYE, seeks to make monthly payments more affordable, and offers forgiveness of balances that were originally $12,000 or lower after 120 payments, among other improvements. Also, please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as SAVE, or extended repayment plans.
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Are my retirement goals realistic?
The median retirement account balance for all working Americans is $0, and half of those households are over age 55 (not a typo). But it’s not just a problem for the Boomers. Research has also uncovered that 95% of Millennials are not saving enough for retirement. (Also not a typo.)
It’s a bleak picture, to be sure. But when reality hits hard, motivation can follow. And no one wants retirement to just become one of those things that our parents and grandparents used to enjoy, back in the day.
On average, Americans spend 20 years in retirement. If you earn $75,000 a year when you retire and want to keep the same salary, you’ll need a total of $1.5 million squirreled away.
This is the part where many people might utter the word “impossible.” But if you start saving for retirement now, and make your retirement contributions just as mandatory as your electric bill, that number can start to look a little less intimidating.
In fact, just using a retirement calculator can put you in a better position than many Americans — fewer than half of them have done the math. And once you have your own enormous number, it can get easier to break it down into smaller, more attainable goals along the way.
To be sure, though, the road to retirement is paved with homework and sacrifice. It’s estimated people need 70% to 90% of their pre-retirement income to maintain the same standard of living after they stop working.
So perhaps more than any other financial decision you’ll make, reaching personal retirement goals takes diligence, preparation, planning for the “what if’s” and lots of willpower.
It may seem overwhelming, but it can help to start by determining your retirement objectives. Then you can find your own personal way to crush them. Everyone’s financial situation is different, and this plan is not the only solution out there, but here is one possible way you might go about determining your goals.
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One step you can take to determine your future is to get a solid picture of your present — somewhat like a personal audit. A careful inventory of your current expenses, income, taxes and savings can give you an honest picture of where you are, as well as a realistic look at where your money is going each month.
Once you’ve determined your day-to-day financial picture, you can create a list of any current retirement savings you already have, such as 401(k) accounts, IRAs, or high-yield savings accounts. Total up that number, because you’ll be able to subtract it from your goal.
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A retirement calculator can help you figure out your overall, 20-year lump sum goal by working with variables such as your current age, salary and savings, your desired retirement age and how much you save per year.
Here’s where you can change up the numbers and consider several scenarios. If you were to retire at 67, for example, how much money will you need? What would happen if you were able to up your yearly savings by just 3%? You might even calculate the amount of money you’d need to save to retire early.
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Take a deep breath. Then plan on.
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One possibly helpful way to tackle anything large is to break it down into digestible chunks. To do this, you could subtract your current age from your intended retirement age, then divide that number by the total. That’s your yearly goal. If it’s still overwhelming, you might divide that number by 12 for your monthly goal. Go as far as you need to make it palatable — those “for as little as 3 dollars a day” commercials make it sound easy, right?
For example, if your total number is $800,000 and you’re 30 years from retirement, that breaks down to around $75 a day. But that doesn’t mean you have to put that much into the bank by yourself. A next step you could take is finding the retirement savings plans that will do the most to grow your money.
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With the drastic decline in the traditional, company-provided pension and the uncertain future of Social Security, a number of different individual retirement savings plans, each with specific benefits, have stepped in to take their place.
If your employer offers a 401(k) matching plan, one of the easiest ways to grow your retirement nest egg is to contribute the max amount of money each paycheck that your employer is willing to match.
The contributions are automatically deducted from your paycheck pre-tax, and since you never see the money, it can be much easier to just pretend like it was never there to begin with.
For the self-employed, or for diversification, traditional or Roth IRAs are also specifically designed to help your savings grow.
The biggest advantages of 401(k) and IRA plans are their potential tax savings. However, they can come with yearly contribution limits that don’t mesh with your retirement objectives.
In this case, a general investment account is another possible consideration for growing your wealth. While it likely doesn’t come with tax advantages, it doesn’t come with contribution limits, either.
If investing in the market leaves you feeling wary, or you don’t like the idea of not having access to your money until you reach a certain age, another option to consider is a high-yield savings account.
It’s a cash-based account that has as much flexibility as a regular checking or savings account, but instead of the paltry 0.09% interest offered by some traditional banks, your money can potentially earn 2% or more.
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You’ve calculated your retirement goal. You’ve determined a plan to reach it. And now it’s time for arguably the hardest part — sticking to the plan.
For as many investment or retirement accounts as possible, you might consider setting up automatic contributions to withdraw every payday. The more you can automate, the less you’ll be tempted to move things around.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA/SIPC. The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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