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If you’re thinking of applying for a personal loan, you could understandably be nervous about how this might affect your credit rating. This might be especially true if you’re hoping to take out a mortgage in the not-too-distant future, or if you’ve been working to improve your credit rating.
Will loan applications be visible on my credit file?
Yes. Loan applications almost always involve an “application” or “hard” credit search, which will be logged on your credit file. Lenders don’t report to CRAs whether or not the application was successful, however.
A loan application will remain on your credit file for up to two years. When you make a loan repayment, by contrast, this will remain on your credit file permanently.
Will a loan application damage my credit score?
Any application for credit can have an adverse impact on your credit score. A responsible lender will always run a “hard” search on your credit history before offering you a loan, and it’s normal for this search to have a slight negative impact on your credit score.
The good news is that it’s widely believed this negative impact can be erased through a few months of sensible financial behaviour (paying direct debits and bills on time, for example).
It’s worth noting that there are a handful of separate but widely-used credit reference agencies (CRAs) in the UK, so as an individual, you don’t have one definitive credit score.
Most of us have to borrow money at various points in our lives, so one or two applications for credit every few years is fairly standard stuff. Anybody reviewing your credit record is unlike to be alarmed by this.
How can loan applications affect my chances of securing credit in the future?
If you make multiple applications for credit in a short space of time, not only will you affect your credit score but it’s possible that a potential lender might see this as an indicator of severe financial difficulties. While the lender can’t be certain whether you’ve had applications rejected without asking you, it may draw conclusions from your credit file – for example if you made a number of applications for credit, but these were not followed by any repayments.
Because of this, it’s a smart idea to take a little time to research what loans you are likely to be approved for, and only apply for one of those – it’ll save you from wasting your own time as well.
If you haven’t already, you can check your credit report. This is free with companies such as Experian, TransUnion (formerly Callcredit) or Equifax. It has no impact on your credit score, and will give valuable information about the products you are likely to be eligible for.
It’s also a good idea to check to see if you meet a lender’s minimum eligibility criteria before applying for a loan. Many lenders will even let you run a “soft search” to test your eligibility. This gives you a pretty good idea of whether or not you’ll get approved, without affecting your credit score – so there’s no downside.
The overall impact of a loan application on your credit score is believed to be minimal, so it’s rare that it will make or break your application for a small loan. Your credit history in the months and years before your application will have a far bigger impact. However, if you’re planning on applying for a mortgage or large loan in the near future, it’s a good idea to avoid applying for any products that involve a credit check. With these large loans, the average applicant needs all the help they can get to be approved.
Compare personal loans
Now that you know about the potential effects on your credit file and future applications, you can compare lenders to find the best rates.
With no guarantor
With a guarantor
With a guarantor who is a homeowner
- Check your credit report to get an idea of how you look to lenders.
- Check you meet a lender’s a minimum eligibility criteria before applying for a loan.
- Use eligibility checkers (either the lenders’ or a broker’s) to find out if it’s worth applying for a loan in the first place.
- Shop around and then apply to one lender that you’re reasonably confident will approve your application.
- Quickly sense-check whether a personal loan is the smartest option (in some cases, a credit card can work out cheaper).
- Make multiple applications for a loan in a short amount of time.
- Apply for any financial products in the months leading up to a mortgage application.
- Apply without running an eligibility checker first.
- Apply unless you’re confident you can meet the repayment schedule.
Stuart's loan applications and his credit score
Stuart was constantly struggling to pay bills at the end of the month. He regularly applied for the cheapest personal loan he could find, without doing any checks into his perceived creditworthiness. Sometimes he’d be accepted. Other times, he’d be turned down and have to make another application.
As the months went on, he found it harder to be approved for these products. Even though he paid the loans back on time, each application harmed his credit score even further. Eventually, he could only be approved for high-interest products such as payday-style loans from companies like Sunny.
Thankfully, he ultimately sought help from a debt specialist in order to rebuild his finances and his credit score.
The bottom line
Loan applications do have a slight – and normally temporary – impact on your credit score. There’s nothing inherently wrong with making applications for credit, though. In fact if a prospective lender can see that you’ve made a sensible number of applications in the past and that you always repaid outstanding credit on time, they’re more likely to trust you with their money than if you had little or no evidence of managing debt responsibly.
Frequently asked questions
Read about how different factors can affect your score
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