How Does a Personal Loan Impact My Credit Score?

Taking out a personal loan can help meet big expenses such as a wedding, a medical emergency, or debt consolidation. But how does a personal loan affect your credit score? The answer is not simply good or bad. A loan can either help or harm your credit standing, depending on how you manage it.

This guide explains the relationship between personal loans and your CIBIL score. You will learn how applying for and repaying a loan affects your score, the main factors to watch, and best practices for keeping your credit healthy.

What is a CIBIL Score?

A CIBIL score is a three-digit number from 300 to 900 that summarises your credit history. TransUnion CIBIL, one of India’s major credit bureaus, calculates this score from your credit report. It serves as a snapshot of your creditworthiness.

Banks and NBFCs rely heavily on this number to assess lending risk. A higher score signals responsible credit behaviour and makes you a more attractive borrower. A low score suggests a higher risk, which may lead to rejection or less favourable loan terms.

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For personal loans, which are usually unsecured (no collateral), the CIBIL score is especially important. Since lenders cannot recover assets if you default, they use your score as a primary measure of reliability. A strong CIBIL score increases your chances of approval and better terms.

How Does a Personal Loan Affect Your CIBIL Score?

A personal loan can affect your CIBIL score at different stages: when you apply, when the loan is disbursed, and while you repay it.

The Loan Application and Hard Inquiry Effect

When you apply, the lender performs a hard inquiry on your credit report. Each hard inquiry can cause a slight, temporary dip in your CIBIL score. Multiple applications in a short period can add up and signal financial stress, leading to a larger drop. That is why checking eligibility and comparing offers before applying is wise.

Effect of Loan Disbursal

Once disbursed, the loan appears on your credit report as a new account. This can affect your score in two main ways:

• Credit Mix: Adding an instalment loan can improve your credit mix if you previously only had revolving credit, such as credit cards. A varied credit mix can be beneficial.
• Average Age of Credit: Opening a new account reduces the average age of your credit accounts, which can cause a small, temporary adverse effect.

Impact of Repayments

How you repay the loan has the biggest influence on your score.

• Positive Impact: Paying EMIs on time builds a reliable payment history and helps improve your CIBIL score.
• Negative Impact: Missing or delaying EMIs damages your score. Payment history is the single most important factor in your CIBIL score.

Key Factors of Loans That Influence Credit Score

Several loan-related elements determine how your credit score is affected.

Hard Inquiry

Every formal loan application results in a hard inquiry. One inquiry has minimal effect, but several within a short span can lower your score. Compare offers and check pre-eligibility where possible.

Credit Utilisation Ratio

This mainly applies to revolving credit, like credit cards. Personal loans do not directly add to your utilisation ratio, but using a personal loan to pay off credit card balances lowers utilisation and can boost your score.

Repayment History

This is the most critical factor. Timely EMI payments account for a large portion of your CIBIL score. A clean payment record reliably improves your credit standing.

Credit Mix

Lenders prefer to see that you can handle different types of credit. Adding an instalment loan can help diversify your credit mix if most of your accounts are revolving.

Credit Age

The average age of your credit accounts matters. Taking a new loan can lower this average, which may have a small adverse effect - especially if your credit history is young.

Can Personal Loans Help Improve Your Credit Score?

Yes, when used and repaid responsibly, a personal loan can improve your credit score. One practical use is debt consolidation. If you have several high-interest credit card balances, a personal loan can pay them off, leaving you with one manageable EMI, usually at a lower interest rate. This reduces credit card utilisation, which often leads to a notable improvement in your CIBIL score.

For example, if someone clears high card balances with a personal loan and then makes timely EMI payments while keeping card balances low, their score can rise significantly within a few months. Regular on-time payments on an instalment loan also build a history of responsible borrowing, which strengthens your credit profile over time.

Common Mistakes That Harm Your Credit Score With Personal Loans

Avoid these common pitfalls to prevent damage to your credit score:

• Multiple Loan Applications: Submitting many applications in a short time triggers several hard inquiries and can reduce your score.
• Missing or Late EMIs: Late payments are reported and can cause major drops in your score.
• Borrowing More Than You Can Afford: A high EMI burden increases default risk. Use an EMI calculator to confirm affordability.
• Not Monitoring Your Credit Report: Errors or fraud on your report can hurt your score without your knowledge. Check your report regularly.

How to Manage Your Loan to Maintain a Healthy CIBIL Score?

Follow these practices to keep your score healthy after taking a personal loan:

• Check Eligibility First: Use eligibility tools to avoid unnecessary formal applications that cause hard inquiries.
• Choose Affordable EMIs: Pick a loan amount and tenure that result in EMIs you can comfortably pay.
• Automate Payments: Set up auto-debit for EMIs so you do not miss payments. Keep an emergency fund to fall back on if needed.
• Review Your Credit Report Regularly: Check your CIBIL report at least once a year to spot errors early.
• Avoid Frequent Refinancing: While refinancing may offer better terms, doing it too often creates new inquiries and reduces the average age of active accounts.

Conclusion

Ultimately, the effect of a personal loan on your credit score depends on how you manage it. A loan is a financial tool, and its impact depends on your actions. Borrow responsibly, make timely payments, and consider using loans strategically - for example, to consolidate high-interest debt. Done right, a personal loan can improve your credit history and help you build a stronger CIBIL score.

Frequently Asked Questions

1. Does applying for a Personal Loan reduce my CIBIL score?

Yes, applying can temporarily reduce your CIBIL score by a few points because of the hard inquiry.

2. How long does a Personal Loan inquiry affect my credit score?

A hard inquiry stays on your credit report for up to two years, but its impact on your CIBIL score fades over time and is usually minimal after a few months.

3. Will repaying my Personal Loan early improve my credit score?

Not necessarily. Early repayment is financially beneficial because it saves on interest, but keeping an account open with a long history of on-time payments can be beneficial for your score.

4. Can a Personal Loan help if I have a low credit score?

It may be harder to get approval with a low score, but if you do get a loan and repay it reliably, it can help rebuild your credit over time.

5. How does the loan amount affect my credit score?

The loan amount affects your score indirectly through the EMI burden and overall debt level. Timely payments help your score; missed payments and high debt reduce it.

6. Are Personal Loans from NBFCs reported to CIBIL?

Yes. Most reputable NBFCs report loan accounts and payment history to credit bureaus like CIBIL.

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