Do loans affect your credit score?
Written by
Joe Towner
Reviewed by
Amy LancashireYes, loans affect your credit score, and they do it at three stages. When you apply, the lender runs a hard credit check, which can cause a small, temporary dip. When you take the loan out, you're adding new debt and lowering the average age of your accounts. And as you repay, on-time payments positively impact your score over time, while missed payments can damage it. If you repay the loan fully and on time your credit score may go up, though it depends on any other credit and changes to your circumstances.
Applying for a loan
When you formally apply, the lender runs a hard credit check (a hard search), which is recorded on your credit file. This can knock points off your score and is usually visible to other lenders for about a year. One or two searches aren't necessarily a big problem, but several in a short space of time can look like you're struggling to get credit, which can count against you. Many lenders let you check your eligibility for a loan first with a soft credit check, which doesn't affect your score.
Taking out the loan
Once the loan is open, two things happen. You've taken on new debt, which can lower your score slightly at first. And a new account reduces the average age of your credit history, which can also nudge it down. These effects are usually small and temporary, and they recover as you make payments. Unlike a credit card, a personal loan is instalment debt, so it isn't judged on credit utilisation the way a card balance is; the balance simply falls as you repay.
Repaying the loan
This is where a loan can positively impact your score. Your payment history is a significant factor in your credit score, so every payment you make on time builds a track record that shows lenders that you can handle debt responsibly. While having a lot of different credit might suggest you’re relying on borrowing too much, having a few types of credit, like a loan, credit card and some utility bills shows a normal usage.
Missed payments and defaults
The flip side is that missed payments do real damage. A late or missed payment can stay on your credit file for six years, and if you fall far enough behind the lender can register a default, which also stays for six years from the date it's recorded, even after you've repaid. Both make you look riskier to lenders. If you're heading for a missed payment, contact your lender early, as they may be able to help. You can read more about how long missed payments stay on your credit report and how long defaults stay on your credit file.
Does the type of loan matter?
The impact is broadly the same across loans, but there are a few differences worth knowing:
Personal loans appear on your file and affect your score exactly as above.
Debt consolidation loans can help if they let you make one manageable payment on time, but they add a new account and a hard search, and won't help if you take on additional debt. Here's what debt consolidation is.
Payday loans appear on your file like any other loan. Repaying one on time isn't a negative in itself, but some lenders view recent payday borrowing cautiously when they assess you. Here's what a payday loan is.
UK student loans These are different from personal loans. Loans from the Student Loans Company don't appear on your credit file and don't affect your credit score, because they sit outside the consumer credit system and are repaid through the tax system. They can still affect what you can afford when a lender assesses a mortgage, but that's a separate check, not your credit score.
How can I protect my credit score when I have a loan?
Pay on time, every time. Set up a direct debit so you don't miss one.
Space out applications rather than applying for several at once.
Check your chances with a soft search before you apply.
Keep an eye on your credit file and report anything that looks wrong.
If money's tight, talk to your lender before you miss a payment.
For more, see how to improve your credit score and what affects your credit score.
FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
