Personal loans among the most common forms of consumer credit in Australia, yet there is still confusion about how they interact with your credit score. Many borrowers want to know whether taking out a personal loan will hurt their credit profile, help it or have little impact at all. The answer depends on how the loan is applied for, managed and repaid over time.
This guide explains how personal loans affect your credit score in practical terms. It draws on information from Australian credit reporting bodies, as well as guidance from ASIC and major lenders. The aim is to replace assumptions with facts, and to clarify where short-term changes differ from long-term outcomes.
Key takeaways
- Personal loans do affect your credit score in Australia, but the impact is shaped by behaviour rather than by the loan itself.
- Applying for a loan creates a visible enquiry on your credit report, causing a small, temporary change.
- Personal loans used for purposes like debt consolidation, car purchases or home improvements can sit comfortably within a strong credit profile when structured appropriately.
- For Australians comparing personal loan options, the key is applying selectively, borrowing within realistic limits and maintaining reliable repayment habits.
What is a credit score in Australia, and how does it work?
A credit score is a numerical representation of how a person has managed credit over time. It is calculated by independent credit reporting bodies, primarily Equifax and Experian. Each agency uses its own scoring model, so a score can vary slightly between providers.
Australian credit scores are based on comprehensive credit reporting. This means lenders can see both positive and negative information on a credit report. According to the Australian Securities and Investments Commission, this includes repayment history, the types of credit held, the number of recent applications and whether any accounts have been overdue or defaulted on.
When a lender assesses a personal loan application, the credit score is used as an initial risk indicator. It does not operate in isolation. Income, existing debts and overall affordability are also considered, but the credit score provides a fast way to gauge how reliably someone has handled credit in the past.
Do personal loans affect your credit score?
Yes, personal loans do affect your credit score, but the effect is not automatically negative. A personal loan becomes part of your credit file from the point of application and continues to influence your profile for the life of the loan.
Credit reporting bodies treat personal loans as instalment credit. This differs from revolving credit such as credit cards. Instalment loans have a fixed term and set repayments, which allows lenders to assess repayment behaviour with a higher level of certainty. How that behaviour unfolds is what ultimately shapes the impact on your score.
A personal loan can contribute positively when repayments are made on time and the loan remains well within your financial capacity. The same loan can have a negative effect if repayments are missed or if the borrower applies for multiple loans in a short period.
How much do personal loans affect your credit score?
There is no fixed number of points that a personal loan will add or subtract from a credit score. The impact varies based on individual circumstances and how the loan is managed.
Credit scores respond to patterns rather than single actions, and one application is unlikely to cause a major change on its own. Repeated applications, missed repayments or signs of financial stress carry more weight and can lead to larger score movements.
The size of the loan also does not directly determine the size of the impact. What matters more is whether repayments are made on time and whether the overall level of debt remains manageable relative to income.
Does the act of applying for a personal loan affect your credit score?
The application for a personal loan triggers a hard enquiry on your credit file. This shows that a lender has formally assessed your creditworthiness. These enquiries are visible to other lenders and remain on your credit report for up to five years, although their influence on scoring reduces over time.
A single loan application typically causes a small, short-term dip in a credit score. This is a normal part of borrowing and is not usually a concern for borrowers with strong credit profiles. Problems arise when multiple applications are made within a short timeframe, as this can signal a “credit-seeking behaviour” to lenders and raise some red flags.
This is why comparing loans carefully before applying matters. Submitting several applications to different lenders can have a greater effect on your credit score than choosing one lender and applying once.
Can taking out a personal loan improve your credit score?
A personal loan can support a healthy credit profile when it is managed well, but improvement is never automatic. Credit reporting bodies respond to patterns of behaviour rather than intent. What matters is how consistently obligations are met over time.
A personal loan may also contribute to credit diversity, which lenders like to see. Lenders prefer to see evidence that a borrower can manage different types of credit responsibly. That said, credit mix plays a smaller role than repayment history. A well-managed loan helps because of behaviour, not because of the product itself.
Factors that matter most when lenders assess personal loans and credit scores
Remember that a credit score is an entry point, not the final decision. Lenders assess the broader credit report alongside financial capacity.
Income stability, existing liabilities and overall affordability play a central role. A strong credit score does not offset insufficient income or excessive existing commitments. Likewise, a single loan application is rarely an issue when supported by sound financial fundamentals. Here are more factors to consider:
1. Repayment history information (RHI)
This is one of the most influential components of an Australian credit score. Under comprehensive credit reporting, lenders can see whether repayments have been made on time, paid late or missed altogether.
Consistent on-time repayments demonstrate responsible credit behaviour and can support a stronger credit profile over time. Late payments, even if only by a few weeks, may be recorded and can have a negative impact depending on frequency and severity.
Missed repayments that remain unpaid for an extended period can escalate into defaults, which are among the most damaging entries on a credit report. Defaults can remain visible for up to five years and may significantly affect future borrowing options.
For borrowers who manage a personal loan within their means and maintain consistent repayments, the loan becomes a positive signal rather than a liability.
3. Amount owed
Credit reports show current balances across open accounts, which helps lenders understand overall exposure and repayment burden.
Higher balances are not inherently negative, but they are assessed in context. Lenders look at how much is owed relative to income and existing commitments. A borrower with manageable balances and clear capacity to repay is viewed differently to someone carrying high debt levels across multiple accounts.
As balances are paid down, risk generally reduces. This can support a stronger credit position over time, particularly when combined with consistent repayment history. Conversely, increasing balances without corresponding income growth can raise concerns, even when repayments have not yet been missed.
3. Debt consolidation
Debt consolidation using a personal loan does affect a credit score in different ways, depending on how it is executed and maintained.
In the short term, applying for a consolidation loan creates a hard enquiry, which again, may cause a modest dip in a credit score. Existing accounts that are paid out may also show as closed on a credit report, which can briefly alter credit utilisation metrics.
Over the longer term, consolidation can be beneficial if it reduces repayment stress. Replacing multiple high-interest debts with a single structured repayment can make obligations easier to manage. When repayments are made consistently, this behaviour is reflected positively on a credit report.
Problems arise when consolidation is treated as a reset rather than a restructure. Running up balances on old credit cards after consolidating can increase total debt and weaken credit outcomes.
Final thoughts on how much personal loans affect credit scores
To restate, personal loans can influence a credit score over the long term, but the effect is shaped by behaviour rather than the product itself. Short-term fluctuations following an application are normal, and long-term outcomes depend on consistency. Ultimately, a personal loan is a financial tool that, when used responsibly, becomes part of a stable credit history.
If you’re considering a personal loan, it pays to choose a lender that makes the true cost clear from day one. NOW Finance offers personal loans with no ongoing fees, competitive rates and straightforward pricing that can make comparisons simpler. You can get your rate now to see what your options could look like, or contact us if you would like to talk through your loan purpose, repayments and the right structure for your situation.
