How does a Personal Loan Affect your Credit Score?

A personal loan can be an effective tool during emergencies to meet large expenses like medical expenses, home renovation and more. But a common question that may arise in your mind is: Will taking a personal loan reduce my CIBIL score?

Taking a personal loan can have both negative and positive impacts, depending on credit enquiries, your repayment behaviour and loan outstanding. Understanding the short-term and long-term impact of a personal loan on your credit score can help you maintain responsible borrower behaviour.

Short-Term Impact of a Personal Loan on Your CIBIL Score

The following are the short-term impacts of a personal loan on your credit score:

Temporary Dip in CIBIL Score Due to Hard Enquiry

When you approach multiple lenders for a personal loan, the lenders access your credit report, which creates an enquiry in your CIBIL report. Multiple enquiries from lenders within a short period can signal that you are actively seeking credit and may temporarily impact your credit profile.

Tip: Compare personal loan offers on the JioFinance app from multiple lenders to choose the right one before submitting multiple formal applications.

Addition of a New Loan Changes Your Credit Profile

Once you avail a personal loan, it becomes a new loan account on your credit report. Adding a new account along with your existing loans can temporarily alter your credit profile. This can potentially make lenders view your profile as more credit-dependent.

Increases Your Total Outstanding Debt

A personal loan increases your total outstanding debt immediately after disbursement. Suppose you already have a car loan of ₹8 lakh and a home loan outstanding of ₹30 lakh; the addition of a ₹3 lakh personal loan to this can substantially increase your total outstanding debt.

While the CIBIL score is not determined simply by adding up your loans, lenders consider your overall credit exposure and repayment behaviour when assessing creditworthiness.

Change in Your Credit Mix

A personal loan is an unsecured loan. Having a combination of secured and unsecured credit shows how effectively you can handle borrowing, provided you manage them responsibly. CIBIL itself notes that responsible use of various types of credit, along with responsible repayment behaviour, can contribute to building a healthy credit history.

Long-Term Impact of a Personal Loan on Your CIBIL Score

Here are the long-term impacts of a personal loan on your credit score:

Missed or Delayed EMIs Can Have a Significant Negative Impact on Your Score

Failing to repay on time or missing a payment is one of the biggest risks of availing a personal loan. Lenders generally report EMI overdue details to the credit information companies. Repeated defaults can negatively impact your credit history and make it considerably harder to avail loans in future.

Timely EMI Payments Set a Healthy Record of Responsible Borrowing

Payment history is a crucial element of a credit profile. Timely payment of EMI helps in strengthening your credit profile. Suppose you take a personal loan of ₹4 lakh for three years and pay every EMI on time. Then, you build a consistent repayment record over the next three years. Your payment behaviour reflects how responsibly you can manage your debt.

Successful Loan Closure Can Strengthen Your Credit History

Closing a personal loan without any EMI defaults and late payments demonstrates your ability to manage debt efficiently. This can have a positive impact on your credit history.

However, remember CIBIL’s scoring methodology considers various factors, not just one isolated factor.

Tips to Protect Your CIBIL Score When Taking a Personal Loan

Here are key tips to protect your CIBIL score while availing a loan:

• Borrow only what you can comfortably repay from your monthly income. Consider your other financial commitments also.
• Avoid multiple loan applications. Compare personal loan options from various lenders first and then make a formal application.
• Do not skip any EMI payments. Set up an auto-debit to ensure payment before the due date.
• Review your CIBIL report periodically and ensure there are no inaccuracies.

Conclusion

Taking a personal loan can have a temporary adverse impact on your credit profile due to the addition of a new loan and hard enquiries. However, you can easily rectify this by avoiding multiple loan applications. Instead, compare the personal loans on the JioFinance app to make a rational choice.

Over the long run, your repayment behaviour is what matters the most. On-time EMI payments, no excessive borrowing and maintaining a healthy credit profile can help you build a stronger credit history. Taking a personal loan does not automatically hurt your CIBIL score. Failing to repay on time is what can seriously damage your credit profile.