Will applying for a personal loan affect my credit score?

Submitting a personal loan application can potentially impact your credit score in two key ways:

• Submitting multiple applications at once – perhaps with the erroneous belief that you might be doubling your chance of approval. However, lenders may see this as a sign of financial distress.

• Reapplying too soon after rejection – Failing to do your due dilligence, getting knocked back by the lender, and then reapplying soon after. If your application is declined, immediately applying elsewhere without addressing the reason can further harm your credit score. 

Both of these mistakes ultimately risk hurting your credit score in the same way.

Each time you submit a personal loan application, the lender will conduct an enquiry on your credit file as one part of the decision-making process. This will be recorded on your file as a credit enquiry and is visible to other lenders who perform subsequent enquiries.

If your credit file has evidence that you have applied for multiple loans at once, or in quick succession, lenders may be hesitant to approve your application as it may be an indication of credit stress.

Credit providers have an obligation to adhere to the responsible lending conduct obligations as imposed by the Australian Securities and Investments Commission (ASIC). That means, if the lender has reason to believe that the credit product you have applied for may be unsuitable for you, they are required to reject the application.

According to both major credit reporting bureaus, Equifax and Experian, having multiple hard enquiries recorded on your file within a short period of time can also have a negative effect on your overall credit score.

While a personal loan application won’t necessarily have any positive affect on your credit score, the way in which you pay off your loan could.

Since the introduction of comprehensive credit reporting, your credit file will show both positive and negative credit events. Which means, if you successfully pay off your loan in accordance with its conditions, you could see a positive impact on your credit score. Making consistent on-time repayments shows lenders that you can manage debt responsibly, which strengthens your credit history.

There are a number of steps you can take before submitting a loan application that could help protect your credit score, including the following:

• Check your credit score – First things first, it’s worth finding out what your credit score is so that you have a better idea of which personal loans you may be eligible for. Plus, regularly accessing your credit file allows you to look out for discrepancies and dispute any that may arise.
• Do your due diligence – This involves making a comprehensive personal loan comparison and compiling a short list of the products that best suit your needs.
• Check the lending criteria – Once you have selected your preferred loan product, it’s time to make sure you meet the lender’s eligibility criteria. It’s crucial that you meet these requirements to avoid having your application rejected. Don’t hesitate to reach out directly to the lender if you have any questions or concerns.
• Ask for preapproval – Plenty of lenders offer preapproval for personal loans so that applicants can find out how much they may be able to borrow before submitting a formal loan application.
• Consider your budget – Whether or not you apply for preapproval, it’s worth doing your own calculations to ensure the loan repayments will fit comfortably within your budget. RateCity’s personal loan calculator can provide you with a repayment estimate based on the loan amount, interest rate and loan term.
• Wait before reapplying – In the unfortunate circumstance that you do have your application rejected, it may be worth waiting for a period of time before you reapply to avoid having too many enquiries recorded on your file. If you are having difficulty managing your finances, consider reaching out to the National Debt Helpline for free financial counselling.