How do Loans Affect Credit Score?

Last Updated : Jan. 29, 2025, 5:05 p.m.

Loans are a great option to turn to when people are in need of urgent funds. There are various types of loans catering to different needs. You have the personal loan for personal needs such as medical emergencies, marriage, etc. Similarly, you can opt for a home loan for home purchase, renovation, or repairs. Vehicle loans are available to buy your dream vehicle. Overall, loans can be categorized into 2 types - Secured and unsecured loans. Secured loans are those that are backed by collateral like gold loan, loan against property, etc. Unsecured loans are those that do not require you to pledge a collateral. The credit score is a very important parameter when it comes to unsecured loans since they are not backed by collateral. If you have a good credit score, your application will be approved swiftly. If you have a poor credit score, your application will be rejected. After taking the loan, not repaying your EMIs on time will also hurt your credit score. Credit cards also have a great impact on Let us now discuss in detail how different types of loans affect your credit score.

What are Different Types of Loans and How Do They Affect Your Credit Score?

As we told before that we can categorize the loans in basically two types – Secured and Unsecured Loans. Under these two categories, there are many kinds of loans such as personal loans, home loans, car loans, loan against property, and others. Apart from these loans, individuals also opt for both secured and unsecured credit cards which also affect your credit score to a large extent. So we will explain how each type of loan and credit card affects your credit score in a detailed way, take a look.

Personal Loan

A personal loan is an unsecured loan for which you do not have to pledge any collateral. Since this loan is unsecured, the interest rates can be higher compared to other loans. Paying your personal loan EMIs on time enhances your credit score or CIBIL score . A personal loan can be used to pay off the debts from your revolving credit. Clearing your credit card debt will also improve your credit score. The following actions will impact your credit score negatively.

• Delayed repayments.
• Applying for multiple personal loans in a short span of time impacts your credit score negatively. This is because lenders make hard credit pulls on your credit report. Multiple hard enquiries will bring down your credit score. So, do not apply for credit unless it is necessary. Also, apply with a lender that offers you a loan at attractive terms and conditions.
• If your loan application is rejected, then do not apply for credit immediately.

Home Loan

Home loan is one of the most popular loan products in our country. Home loans are secured in nature, and you can get one by pledging your home/plot/land as collateral. Taking a home loan and paying your dues on time enhances your credit score. Also, home loans on your credit report help in creating a good credit mix, which will ultimately improve your credit score. Considering your positive repayment history, you may be eligible even for a top up loan or even a pre-approved loan. You do not have to submit any documents separately for this.

Four-wheeler or Car Loan

A four-wheeler or car loan is also a secured loan. Your vehicle will act as the collateral against the loan amount. Although a car loan is a secured loan, the credit score is very crucial in the approval of this loan. This is because the value of the car depreciates over time. If you default, the lender may find it difficult to recover the dues even after selling the vehicle. Without having a good credit score of 700 or above, you will have to face a lot of difficulty in getting the loan. Paying your car loan EMIs on time will automatically increase your credit score. In contrast, missing due dates and late payment will impact your credit score negatively. And in the case of default, you can lose your vehicle too, which is the collateral against your car loan.

Loan Against Property

For people who cannot get a loan easily, a loan against property is one of the best options. It is a secured loan. By making timely repayments for this loan, your credit score will increase over time. Also, the loan helps in creating a good credit mix. Having a better credit mix has an impact on your credit score in a positive way.

Secured and Unsecured Credit Cards

Other than loans, credit cards impact your credit score depending on their nature and how you use them. Credit cards are of two types – Secured and unsecured. Unsecured credit cards do not need any kind of security, while secured cards are given to customers against a fixed deposit. The overall limit of your secured credit card is based on the value of your fixed deposit. Some of the top secured credit cards are SBI Unnati Credit Card , Axis Insta Easy Credit Card, ICICI Instant Platinum Credit Card, IndusInd Aura Credit Card , HDFC Regalia Credit Card , etc. You can opt for these credit cards if you cannot get an unsecured one due to the low credit score.

Paying your credit card bills on or before the due date has a positive impact on your credit score and vice versa. If you have delayed the payments by more than a month frequently, it will hurt your credit score. If you are not able to make the payments in full, then you can pay the minimum amount due. However, making it a habit to just pay the minimum amount due can spike up the debt to huge proportions. Payments will become difficult, and this sort of payment behavior will be highly detrimental to your credit score. So, use your credit card judiciously.

Factors through which Loans Affect your Credit Score

Let us now understand the various factors that are used to compute the credit score, which ranges from 300 to 900 in India. Your credit score is determined by factors such as your payment history, current debt, length of current history, credit mix, and current debt. When you take a loan, these factors get impacted and subsequently your credit score. Let us now understand the weightage given for each of the factors that impact your credit score.

Let us now discuss each of these points in detail:

Credit Payment History

This is one of the major factors that affect your credit score. Making timely payments of your loan and credit cards entail almost 35% of your credit score. So, pay all your EMIs and credit card bills on time. Not paying your EMIs and bills on time frequently will lead to debt accumulation. In case of credit cards, the outstanding amount due will be charged interest also. Altogether, there will be a staggering amount of outstanding debt which will be difficult to repay. Before giving any type of credit to you, lenders check your credit score to see if you are punctual with the repayment. Many lenders instantly reject the loan application if you’ve a poor credit score. Even if the loan is sanctioned, the interest rates will be much higher, raising your EMI obligations. So, the key to improving your score is to always make full repayments on time.

Existing Outstanding Debt

The second most important factor is the current debt you’re having. Sometimes it doesn’t affect your credit score directly but it reduces your ability to take up more debt. Before sanctioning any loan to you, lenders check your existing obligations which can be seen on your credit report. Now suppose you already have a huge debt on your name, lenders could reject your fresh application citing a reason that you won’t be able to service any new debt. This can be done by checking your Debt to Income Ratio (DIR). If this ratio of yours is low, then it means that you could get an additional loan. In case the proportion of debt to income increases, your repayment capability weakens accordingly. So it is not wise to take up loans beyond your repayment capability. This also affects your credit score negatively. When you have a debt amount that you can pay on time, your score will increase. So, do not take loans just for the sake of it as it may hurt your score.

Length of Credit History

This factor also plays a huge role in computing your credit score. A long credit history automatically indicates that you have been managing debts for a long time. If you have been paying your dues on time, it will reflect better on your credit history. That is why you will get pre-approved loans easily when you pay your home loan (Home loans are of longer duration typically) EMIs on time. Your credit history starts from the exact day when you opt for any credit card or loan for the first time. Having a longer credit history has a positive impact on your credit score.

Better Credit Mix

This factor has a 10% weightage in your overall credit score. Credit mix means having a mixture of both secured and unsecured loans. For example, if you have been using a credit card for a long time, and suddenly you are in need of funds for some emergency. Then it would be wise to opt for a loan against property or a loan against a fixed deposit or any other assets as compared to opting for a personal loan. As you already have an unsecured credit card, opting for a secured loan would be a smart choice to give the required variety to your credit profile. It is not that your credit score will not improve if you do not have a credit mix, but having a credit mix will improve your score at a much faster rate. But you need to make repayments on time.

New Credit

Having a new credit is also important but you must keep it in mind that you must not take a loan just for the sake of it. Apply for the loan only when you need it the most. Taking new credit helps you in increasing your credit length and having a better credit mix. However, if you can not repay it on time, it will only impact your score negatively. So, take a loan after checking your credit requirement, repayment capability and monthly income.