Last Updated : Dec. 17, 2016, 1:36 p.m.
Building a good credit score is very similar to building a good reputation, especially when you are looking for a personal loan. Yes, a good credit score plays a vital role in your loan journey as it can either make or break the situation for you. But, it is also a fact that few situations in life cannot be ignored as they need your attention right away. Situations like a medical emergency, debt consolidation, buying a new appliance or renovating a home, need funds so that these requirements can instantly be fulfilled. And, this is where a personal loan comes into the picture, giving you an opportunity to live your dreams without worrying about cash in hand.
Fact of the matter : Does a personal loan improve credit score ?
What to do if you have a bad credit score? Does a personal loan improve your credit score? What are the ways that can help in improving your score, thus making you eligible to apply for a loan? These are the few questions that may disturb you, make you think that you won’t avail a personal loan in the future. Wait a minute! Are you thinking that it is not possible to avail a personal with bad credit score? If yes, hold your breath because what’s coming next will fill your life with extreme delight.
Well, let’s reveal the suspense! Did you know that personal loan can boost your credit score? What, sounds unbelievable to you? But folks it is true that a personal loan can actually be a great way in improving those key inputs in building your credit.
So, without wasting any time let’s get started and look at the ways that can be a saver for your poor credit score.
A Collateral Can Be a Boon:
Yes, you read that absolutely right. As a rule, if you have a higher credit score, you can enjoy better interest rates on your loan. But, don’t be disheartened as those who are not in 750+club can also get reasonable rates, if they have a collateral by their side. Most of the banks and non- banking financial companies (NBFCs) provide a personal loan to such applicants, by mortgaging an asset be it home, car, gold, etc. Having a collateral is just like a boon as it can help you in availing a loan with the maximum amount. By giving any sort of collateral or security to the lender a loan can be availed by you and not only this, you can get a loan for up to maximum loan amount. Isn’t it great news folks? But, do make sure that you repay the loan this time without any default because if you won’t do it this time, not only your credit will badly affect, but you may also lose your asset to the lender. So,go and fulfill your wish as now there is no one you can stop you from chasing your dreams.
A Co-applicant Can Be Your Best Buddy:
If you are finding it difficult to avail a loan individually so as to improve your credit, nothing to worry as you have another great option. Well, adding a co-applicant to your loan can work wonders for you and help you in getting a loan easily. If your score is low, most of the lenders don’t consider you eligible for a personal loan as you have a bad credit history. But, adding a co-applicant to your loan application is undoubtedly a smart move as it can helpful for you in many ways. Just because you have a poor credit score, so it would be difficult for a lender to trust you again, hence a co-applicant in that situation will legally be responsible for repaying the loan on your behalf. The lenders are always more than happy to welcome a co-applicant because they know someone would repay the loan, in case you won’t. So, keep your worries away and don’t let anything come in between you and your happiness.
Now that you know how does a personal loan improve credit score, thus there is no looking back. So, what are you waiting for? Put a big smile on your face and apply for a personal loan today without bothering about your low credit score to achieve all your dreams.
FAQs
Key takeaways
Will a personal loan improve my credit score? ›
A personal loan can positively affect your credit scores if you make consistent, on-time payments. A personal loan could also affect your credit mix and total debt, two important credit-scoring factors.
How many points does personal loan affect credit score? ›
A hard inquiry can reduce your credit score one to five points, even if you're not approved for the loan in the end. If you miss a payment on your loan, even just once, your score could drop up to 180 points.
How much will my credit score drop if I apply for a personal loan? ›
Hard credit checks temporarily lower your credit score by as much as 10 points. But if you have excellent credit, applying for a loan will most likely make your score drop by five points or less.
Should you take loan to improve credit score? ›
Taking out a loan and making your payments on time and in full every month can help you build a responsible credit history. Of course, if you don't make your payments on time and in full every month, you can quickly hurt your score, too.
Can I get a loan to fix my credit? ›
A personal loan may help with most of the five factors that influence your credit scores. Payment history: Getting a loan and making all of your monthly payments on time establishes a track record of regular activity.
Can I get a personal loan if my credit score is bad? ›
Despite your low score, many lenders will be ready to offer loans to you but they may charge a slightly higher rate of interest. Many fintech platforms and NBFCs these days offer personal loans despite a low credit score and some of these have been listed below: Credit Sudhaar Finance.
Is it better to pay off credit card debt with a personal loan? ›
As of November 2023, the average interest rate on a personal loan with a 24-month term was 12.35%, according to data from the Federal Reserve. So, by using a personal loan to pay off your credit card debt, there could be significant savings, as the average credit card rate is currently 21.47%.
Can paying off a loan hurt your credit? ›
It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.
Do personal loans hurt credit more than credit cards? ›
Your credit utilization, 30% of your credit score, is the amount of money you borrow compared with the available credit on your revolving credit lines, like credit card accounts. Since a personal loan is a type of installment loan and not revolving credit, it doesn't add to your credit utilization.
You paid off your only installment loan or revolving debt
Creditors like to see that you can manage a mix of installment debts like loans and revolving debts like credit cards. For example, if you paid off your only personal loan and don't have other installment loans (like a car loan), that could cause a small dip.
Can I use a personal loan to buy a car? ›
Personal loans offer high borrowing limits of up to $100,000 for eligible borrowers and can be used for nearly any purpose, even buying a car. However, higher interest rates and tighter credit requirements may mean a personal loan isn't your best option to buy a car. Find the best personal loans with Experian.
What is the minimum credit score for a personal loan? ›
Many give preference to borrowers with good or excellent credit scores (690 and above), but some lenders accept borrowers with bad credit (a score below 630). The typical minimum credit score to qualify for a personal loan is 560 to 660, according to lenders surveyed by NerdWallet.
Will a personal loan help build credit? ›
Though they're a form of debt, personal loans can also serve as a tool to build credit. This is because they can contribute to your payment history and credit mix, as well as lower your credit utilization ratio. Collectively, these three factors account for 75 percent of your credit score.
What credit score do you need to get a $30,000 loan? ›
In general, lenders extend $30,000 loans to borrowers with good to excellent credit, which is typically 670 and higher. But there may be lenders who lend to borrowers with bad credit. If you're having difficulty qualifying, you may consider getting a cosigner or co-borrower to help you get approved for the loan.
What is the best loan to build credit? ›
If you're interested in applying for a credit-builder loan, here are five to consider.
- Best for low credit scores: Self.
- Best for immediate access to money: MoneyLion.
- Best for full-service banking: Digital Federal Credit Union.
- Best for larger loan amounts: Credit Strong.
The borrower makes monthly payments according to the terms of the loan agreement. Making on-time monthly payment builds your credit score and helps contribute to your credit mix. Paying off an installment loan will cause a slight temporary drop in credit score.
Is a personal loan a good way to pay off debt? ›
A personal loan can help you consolidate your debt into a single, lower-interest loan, which may save you money in the long run. Likewise, if you have multiple credit cards with balances, it can be overwhelming to keep track of them all.
