So how does taking out a personal loan impact your credit score?

If you were hoping for a simple answer, there isn’t really one because a personal loan could either help or hinder your credit score based on how you use it. Generally speaking though, personal loans are a form of consumer debt and are more likely to do harm than good.

We’ll explain how personal loans could help or hurt your credit report and how to manage a personal loan responsibly so you don’t inadvertently ruin your credit score.

In the market for a new car? The table below features car loans with some of the lowest fixed interest rates on the market.

Lender

FixedNew1 year
More details
Approval within 24 hoursEarly payout available
  • Required: Good credit history, stable employment history. Aus citizenship or PR.
Approval within 24 hoursEarly payout available

New Car Loan - Special (Fixed)

  • Required: Good credit history, stable employment history. Aus citizenship or PR.
FixedNew1 year
More details
Approval within 24 hours
  • Save the planet. Save thousands on your car loan.
  • Get a discounted rate if you buy electric
  • Required: Good credit history, stable employment history. Aus citizenship or PR.
Approval within 24 hours

Green Car Loan Fixed

  • Save the planet. Save thousands on your car loan.
  • Get a discounted rate if you buy electric
  • Required: Good credit history, stable employment history. Aus citizenship or PR.
FixedNew2 years
More details

New Vehicle Fast Loan Low Rate

    FixedNew99 years
    More details
    Loan amounts from $2k to $75k
    • Available for any new motorised vehicle
    • No ongoing or early exit fees
    • 1-7 years loan terms. Pay monthly, fortnightly, or weekly
    • Get quick decision. Funds in 24 hrs if approved
    Loan amounts from $2k to $75k

    New Car Loan

    • Available for any new motorised vehicle
    • No ongoing or early exit fees
    • 1-7 years loan terms. Pay monthly, fortnightly, or weekly
    • Get quick decision. Funds in 24 hrs if approved
    VariableNew1 year
    More details

    New / Demo Car Loan (Variable)

      FixedNew1 year
      More details

      New / Demo Car Loan (Fixed)

        FixedNew, Used99 years
        More details

        New or Used Car Loan Special

          FixedNew, Used7 years
          More details
          No ongoing fees
          No ongoing fees

          Plenti Car Loan (Refinance)

            FixedNew, Used99 years
            More details

            Unsecured Car Loan Excellent Credit

              FixedNew5 years
              More details

              Fixed Car Loan (New)

                FixedNew, Used7 years
                More details

                Secured Car Loan

                  VariableNew, Used10 years
                  More details

                  Car Loan

                    FixedNew, Used99 years
                    More details

                    Car Loan

                      Important Information and Comparison Rate Warning

                      All products with a link to a product provider’s website have a commercial marketing relationship between us and these providers. These products may appear prominently and first within the search tables regardless of their attributes and may include products marked as promoted, featured or sponsored. The link to a product provider’s website will allow you to get more information or apply for the product. By de-selecting “Show online partners only” additional non-commercialised products may be displayed and re-sorted at the top of the table. For more information on how we’ve selected these “Sponsored”, “Featured” and “Promoted” products, the products we compare, how we make money, and other important information about our service, please click here.

                      The comparison rates in this table are based on a loan of $30,000 and a term of 5 years unless indicated otherwise. The comparison rates for car loans and secured personal loans for the relevant amounts and terms are for secured loans unless indicated otherwise. The comparison rates for unsecured personal loans are applicable for unsecured loans only. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.

                      Monthly repayment figures are estimates only, exclude fees and are based on the advertised rate for the term and for the loan amount entered. Actual repayments will depend on your individual circumstances and interest rate changes. Rates correct as of May 26, 2024. View disclaimer.

                      What is a personal loan?

                      At its simplest, a personal loan allows you to borrow money from a lender or financial institution for purposes such as consolidating debt, or paying for such things as a holiday or wedding, and requires you to make regular repayments over a set period of time (often seven years).

                      How a personal loan could help your credit score

                      A personal loan could potentially help your credit score if it's managed responsibly. Here’s how.

                      Making repayments on time

                      According to credit reporting agency Experian, demonstrating that you can consistently meet loan repayments over a period of time could help to establish a positive repayment history, which could help build your credit score.

                      This is because since July 2018, many major banks in Australia now use comprehensive credit reporting (CCR) which gives lenders a more comprehensive assessment of a borrower’s abilities by marking good habits (like making regular repayments) on a person’s credit report.

                      See also: What is a credit score? Does it matter?

                      But before taking out any form of credit such as a personal loan, make sure that you know you can afford to make the repayments in full and on time because as soon as you miss a repayment, you can be sure that will negatively impact your credit score.

                      How a personal loan could hurt your credit score

                      If you don’t manage a personal loan responsibly, you can damage your credit score. Here’s how.

                      Failing to make repayments on time

                      Even missing just one repayment will be recorded on your credit report and will negatively impact your credit score, making it harder for you to borrow money in the future. Defaulting on the loan (not being able to pay it back at all) will also have a negative impact on your credit score.

                      This is why it’s extremely important to work out how much you can afford to borrow and whether or not you can afford the repayments before taking out a personal loan.

                      Applying for too many personal loans

                      It’s important to shop around and compare lenders, but be very careful not to apply for too many personal loans at once as every application (also known as a hard inquiry) is recorded on your credit report. Too many hard inquiries in a short space of time can negatively impact your credit score and be a red flag for lenders.

                      If you’ve been rejected for a personal loan, don’t continue applying for more. Find out why your application was rejected and work on improving those issues before applying for any more loans. Often, loan rejection occurs because you don’t have a good credit score to begin with (have you ever missed a repayment or defaulted on a loan in the past?) or because the lender doesn’t think you could afford to repay the loan based on your income, expenses and debts.

                      See also: How to check your credit score

                      Savings.com.au’s two cents

                      When used responsibly, personal loans could potentially help your credit score if you make repayments on time. However, it’s important to note that you don’t actually need to take out credit to build your credit score - this is a very common misconception. Simply making bill or rent payments on time can help you build up a good credit score.

                      If you’re not careful and don’t use personal loans responsibly, you could damage your credit score which could make it harder for you to borrow money in the future. Before taking out a personal loan, carefully weigh up the risks and consider how much you can afford to borrow and whether or not you can afford to make the repayments to decide if a personal loan is the right option for you.

                      Photo by Anna Nekrashevich from Pexels