Published on Dec 4, 2024Updated on Aug 31, 2026
According to the Credit Information Bureau of India Limited (CIBIL), 79% of loans or credit cards approved by financial institutions go to individuals with high CIBIL scores. Undoubtedly, credit scores play a crucial role in the approval process of personal loan applications. But did you know that the personal loans can also affect credit scores?
Whether a personal loan improves or lowers your credit score depends on several factors such as how you manage repayments, its impact on your credit utilisation ratio, the loan tenure, and more.
This article explores the relationship between personal loans and credit scores, providing insights into how personal loans can affect your creditworthiness.
Before diving into how personal loans influence credit ratings, let us understand the basics of each component.
A personal loan is an unsecured loan offered by lending institutions to address various financial needs, such as medical emergencies, education expenses, or home renovations. Unlike secured loans, personal loans do not require collateral. Approval is based on various factors such as income, credit score, and repayment capacity. Borrowers repay the loan in fixed instalments or EMIs over a predetermined tenure.
A credit score is a three-digit number, typically ranging from 300 to 900, that reflects an individual's creditworthiness. Calculated by credit bureaus like CIBIL, it considers repayment history, credit utilisation, credit mix, and loan enquiries. A higher score indicates better credit health and financial reliability, increasing the chances of loan approval with favourable terms.
Let’s understand the credit score implications of personal loans through the following sections:
Payment history constitutes around 35% of your credit score, making it one of the most influential factors. Lenders report your payment history to credit bureaus, and missing or delaying even a single payment on a personal loan can lower your credit score. On the other hand, timely payments demonstrate your reliability as a borrower. To avoid any negative impact of personal loans on your credit score, ensure you pay your EMIs on time every month.
The credit utilisation ratio is the percentage of your available credit that you use. A high ratio can negatively affect your credit score, while a low ratio reflects financial prudence. Generally, keeping your credit utilisation ratio below 30% is recommended for maintaining a healthy credit score.
Personal loans can indirectly improve your credit utilisation by reducing your reliance on credit cards or other forms of revolving credit. For instance, if a borrower with high credit card debt nearing their limit uses a personal loan to clear this debt, it reduces the utilisation ratio and positively impacts their credit score. However, taking new loans without addressing underlying spending habits may lead to financial difficulties and harm your score.
Often less discussed, loan tenure and credit mix are essential factors impacting credit scores.
The duration of your personal loans affects your credit score by contributing to your credit history length, with longer relationships generally viewed more favourably. Opting for a longer loan tenure means smaller EMIs, which are easier to manage and reduce the likelihood of default. However, they can also lead to higher overall interest costs.
Additionally, maintaining a mix of credit types – secured loans, unsecured loans, and credit cards – shows lenders that you can handle different forms of credit responsibly. Personal loans diversify your credit mix, strengthening your credit profile and potentially boosting your credit score.
A credit enquiry occurs when your credit report is checked. There are two types: hard enquiries, which happen when a lender evaluates your credit during a loan application, and soft enquiries, which occur when you check your own credit report. Soft enquiries have no impact on your credit score, while hard enquiries can temporarily lower it.
Understanding credit enquiries is crucial for managing your credit profile effectively. Multiple hard enquiries in a short period may signal financial distress and negatively affect your score. While there is no fixed limit for the ideal number of hard enquiries, one or two per year are generally considered acceptable. However, more than three hard enquiries within a span of six months can raise red flags with lenders.
Personal loans have a significant impact on your credit score, and with careful financial management, they can serve as a valuable tool for better credit health. Implementing prudent strategies for improving credit after a loan, such as timely payments and reducing credit utilisation, can safeguard and even enhance your credit score over time.
If you are considering a personal loan, SMFG India Credit offers loans of up to INR 10 Lakhs* with competitive interest rates beginning at 12%* per annum. With flexible tenures ranging from 12 to 60 months, you can choose a tenure that best suits your finances. Apply online today or contact us for more details.
* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us
A common misconception is that personal loans lower credit scores. The impact on your CIBIL score depends on how you manage your repayments. Consistent, on-time payments can improve your score while delayed or missed payments can harm it.
Yes, personal loans are reflected in your credit report during credit checks. The details include the loan amount, repayment history, and tenure. Lenders use this information to assess your creditworthiness when considering new loan applications.
Personal loans can be used for a variety of purposes including home renovations, medical emergencies, pursuing higher education in India or abroad, weddings, or consolidating high-interest debts.
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