A personal loan will lower your credit score in the short term, then help it recover and potentially improve it over time

When you take out a personal loan, three things happen to your credit when ready. First, the lender runs a hard inquiry — a formal check of your credit report that costs you a few points, usually 5 to 10. Second, a new account appears on your report, which lowers your average account age. Third, your total available credit changes. These three events together typically drop your score by 10 to 20 points within days of explore.

After that initial dip, your score usually begins to recover within a few months as you make on-time payments. Over 12 to 24 months of consistent payments, your score often ends up higher than it was before you borrowed, because you are now demonstrating that you can handle multiple types of credit responsibly. The catch is that you have to actually make those payments on time — missing even one payment reverses the gain and damages your score far more than the initial dip did.

Key Takeaways

  • A hard inquiry and new account lower your score by 10 to 20 points when ready after you take out a personal loan.
  • On-time payments over the next 12 to 24 months typically raise your score above where it started, because lenders see you managing different types of credit.
  • A single missed payment erases months of recovery and causes a much larger drop than the initial inquiry did.
  • The size of the loan and the interest rate do not affect your score directly — only the inquiry, the new account, and your payment history do.
  • Paying off the loan early stops the benefit of ongoing payment history, so keeping it open and current for at least two years maximizes the score improvement.

Why the hard inquiry costs you points

When you submit a personal loan process, the lender pulls your full credit report from one or more of the three major credit bureaus. This pull is called a hard inquiry (or hard pull), and it signals to other lenders that you are actively seeking new credit. Credit scoring models treat this as a small risk factor — you might be desperate for money, or you might be about to take on more debt than you can handle.

The damage from a single hard inquiry is minor and temporary. Most scoring models weight it at 10% of your overall score, and the impact fades after three to six months. However, multiple hard inquiries in a short window — say, explore to five lenders in two weeks — stack up and cause a larger drop. If you are shopping around for the best rate, try to do all your applications within 14 to 45 days, because most scoring models treat inquiries in that window as a single shopping event rather than five separate applications.

How a new account changes your score when ready

The moment your loan is approved and funded, a new account appears on your credit report. This new account lowers your average account age — one of the factors that scoring models use to assess how long you have been managing credit. If you have five accounts that are all five years old, your average age is five years. Add a brand-new account, and your average drops to about four years. This is why new accounts always hurt your score at first.

The effect is temporary but real. Over time, as the new account ages alongside your older accounts, the average age rises again. After two or three years, the account is no longer "new" and stops dragging down this part of your score. This is one reason why keeping a personal loan open for at least 24 months — even after you have paid it off — can help your score more than paying it off early.

The payment history phase: where your score recovers

Payment history is the single largest factor in your credit score, accounting for 35% of most scoring models. When you make your first on-time payment on a personal loan, you begin building a record that lenders can see. Each on-time payment reinforces the message that you are reliable. After three or four months of consistent payments, your score typically stops falling and begins to rise.

The recovery accelerates over time. By month 12, most people see their score back to where it started before the loan. By month 24, it is often 20 to 50 points higher, depending on what else is on the report. The reason is that you are now demonstrating credit mix — you have both revolving credit (like a credit card, which you can borrow from repeatedly) and installment credit (like a personal loan, which you pay down in fixed monthly amounts). Lenders see this as a sign that you can handle different types of borrowing responsibly.

What happens if you miss a payment

A single missed payment on a personal loan is far more damaging than the initial hard inquiry. While the inquiry costs you 5 to 10 points, a missed payment typically costs 50 to 100 points or more, depending on how late the payment is. A payment that is 30 days late is reported to the credit bureaus and stays on your report for seven years.

If you are struggling to make a payment, contact your lender before the due date. Many lenders offer deferment or forbearance options that let you skip or reduce a payment without it being reported as a miss. These options have limits — you usually cannot defer more than a few months — but they protect your credit score while you get back on your feet. Once a payment is 30 days late, it is too late to prevent the damage, though you should still catch up as soon as you can to prevent it from getting worse.

How loan size and interest rate affect your score

The amount you borrow and the interest rate you pay do not directly affect your credit score. A $5,000 loan and a $50,000 loan have the same impact on your score if you make payments on time. The interest rate also does not matter to the scoring model — a 6% loan and a 15% loan affect your score identically.

What does matter is whether you can afford the monthly payment. If the payment is so high that you cannot make it on time, your score will suffer. This is why it makes sense to borrow only what you need and choose a loan term that fits your budget. A lower monthly payment means you are more likely to pay on time, which means your score will recover faster and climb higher.

Paying off early versus keeping the loan open

Paying off a personal loan early feels like a win, and in many ways it is — you save on interest and become debt-free sooner. However, it does cost you some credit score benefit. Once you pay off the loan, you stop building payment history on that account. The account remains on your report, but it is no longer "active," and lenders see it as less relevant to your current creditworthiness.

If your goal is to maximize your credit score improvement, keeping the loan open and current for at least 24 months before paying it off will give you a larger score boost than paying it off in six months. That said, the difference is usually not huge — perhaps 10 to 20 points — and it should not drive your decision if you have the cash to pay it off and want to be debt-free. The most important thing is making every payment on time, whether you pay it off early or not.

Frequently Asked Questions

How much will my score drop when I explore for a personal loan?

A hard inquiry typically lowers your score by 5 to 10 points. Combined with the new account, you can expect a total drop of 10 to 20 points within a few days of approval. This is temporary — the inquiry stops affecting your score after three to six months, and the new account stops being a drag after two or three years.

Can I avoid the hard inquiry by getting pre-may have access to instead of explore?

Pre-qualification checks usually involve a soft inquiry, which does not affect your score at all. However, a soft inquiry gives you only an estimate of what you might be offered. To actually get the loan, you will need to submit a full process, which triggers the hard inquiry. There is no way to get a real loan offer without one.

Will taking out a personal loan help me build credit if I have no credit history?

Yes. A personal loan is one of the fastest ways to build credit from scratch because it shows lenders that you can handle installment debt. The hard inquiry and new account will still lower your score initially, but if you start with no score at all, you are building from zero. After 12 to 24 months of on-time payments, you will have a measurable credit history that opens doors to better rates on future borrowing.

Does paying off a personal loan early hurt my credit score?

Paying off early does not hurt your score, but it does stop the benefit of ongoing payment history. You lose the boost you would have gotten from 24 months of payments if you pay it off in six months. The account stays on your report, so you still get some benefit, but it is smaller than if you had kept making payments.

What if I have multiple hard inquiries from different lenders?

Multiple inquiries within 14 to 45 days are usually treated as a single shopping event by credit scoring models, so they count as one inquiry rather than several. This is why it is safe to explore to multiple lenders within a short window if you are comparing rates. However, inquiries spread out over months or years each count separately and each lower your score a bit.