Digital distribution of personal loans is rapidly gaining traction in the country. This has resulted in aspiring borrowers turning towards leading financial institutions to apply for and try to secure low-interest loans to meet day-to-day expenses. Still, a common concern among borrowers that continues to float is: Does applying for a personal loan affect your credit score?
The objective here, therefore, is to analyse and understand the influence of a new personal loan application on an individual’s creditworthiness, current credit score, and their overall credit profile.
Amit Bansal, Founder, BharatLoan, says, “Applying for a new personal loan can create a brief dip in your credit score since lenders conduct a hard inquiry to assess your creditworthiness. This effect is short-lived, and what truly shapes long-term credit strength is consistent on-time repayment and thoughtful borrowing decisions that reflect financial discipline. Industry data shows that responsible management of even small loans can steadily improve your overall credit profile.”
‘Hard checks’ can cause temporary dips in credit scores
When you apply for a new personal loan, home loan, or a premium credit card, lenders conduct a hard inquiry, i.e., a ‘hard check’ on your credit profile to evaluate your repayment capacity. This may cause a small, temporary drop in your credit score.
Multiple loan applications made within a short timeframe can intensify this impact. Every single inquiry remains on your credit report for up to two years, but the score dip typically corrects itself with disciplined borrowing behaviour.
How a personal loan can actually boost your credit over time?
A hard inquiry during a personal loan application causes a short-term dip. Still, a new personal loan, if used properly and diligently, can assist borrowers with building long-term credit health and borrowing integrity.
This can be accomplished by:
- Making personal loan EMI repayments on time.
- Focusing on keeping one’s credit profile clean by not missing due dates.
- Consistently following a low debt-to-income ratio to showcase financial stability.
- Avoiding multiple personal loan applications can help project a responsible credit usage.
What are the risks of personal loans?
All personal loans come with inherent risks, such as:
In conclusion, applying for a personal loan may initially lower your credit score, but with careful consideration and proper planning, borrowing can be turned into a pleasant experience.
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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.
