There's no one-size-fits-all answer, and no fixed number of points a loan costs you. Using credit and repaying on time can actually increase your score over time.

Can a loan change your score?#

A loan is a form of credit, so it appears on the credit report that forms the basis of your credit score. Like anything else on there, it can raise or lower your number.

The biggest deciding factor is how you manage the repayments. That said, taking one out brings some small but noticeable changes from the start.

Before applying for a personal loan, mortgage, car finance or any other instalment credit, make sure you can genuinely afford the repayments and the interest.

How a new loan can lower it#

When you apply, the lender runs a hard credit check to review your financial history and judge whether you'll repay reliably.

They'll see your recent financial activity in full: credit accounts, repayment history, and public record information such as your address on the Electoral Roll and any CCJs.

Every hard search leaves a footprint showing other lenders that you've applied for credit elsewhere. One isn't necessarily a problem, though it can lower your score slightly and temporarily.

Several in a short period is different. Lenders may read it as needing to borrow a large amount quickly, or being declined repeatedly — either of which makes them more reluctant.

What to do: limit yourself to around 10 credit applications a year, roughly one a month. If you're comparing rates between lenders, make sure you're making a speculative application rather than a formal one — those involve only a soft check.

How a new loan can raise it#

Using credit is genuinely useful when you're building history, and a loan can help.

If you've only ever used a credit card, a loan adds a new line of credit — diversifying your credit mix, which reassures future lenders that you can manage different types of borrowing.

People who successfully manage a variety of accounts, combining revolving credit (credit cards, where you use, repay and reuse) with instalment credit (loans, repaid incrementally), tend to have higher scores.

You won't necessarily see a big change on day one. A slight shift — possibly a slight drop from the hard check — is what to expect.

While you're paying it off#

This is where the real movement happens, in both directions.

Paying on time and in full is the single best way to build your score. Every month you do it is evidence you're using credit you can afford and aren't in difficulty.

Fall behind and the consequences are serious — and sudden. Where good management produces steady improvement, missing a payment can drop your rating steeply from one month to the next.

Lenders add a sequence of negative payment markers:

  • Missed payments — recorded as late from the point they're one day overdue, shown as a 1 marker.
  • Arrears — consecutive missed repayments, shown as markers 2 to 6, each denting your score further.
  • Defaults — after several months of consecutive missed payments, your lender can mark the debt defaulted. They'll send a notice of default first, and if you don't respond and pay within 14 days, the default is recorded.

Defaults drastically lower your score and keep affecting it even after you pay. A satisfied default looks better than an unsatisfied one, and avoids further steps like debt collection and CCJs — but it can still lower your score for as long as six years.

When you pay it off in full#

Settling your accounts won't automatically give you a good score. There are two reasons the end of an agreement can slightly lower it.

Closed accounts carry less weight than active ones. The credit reference agencies have fewer sources of fresh payment information once the loan is gone. The old account and its positive history stay on your report for six years, but influence your score less than accounts you're still paying — those being a better indication of what you can afford now.

The average age of your accounts falls. Older accounts carry more weight, so paying off a long-held loan — or closing an old credit card — can drop that average noticeably.

Paying off a loan is still a good thing. The blip is short term, and you could well be in a strong position for a new application. Lenders don't see your score; they look at your report, your monthly outgoings — rent, student loans, insurance, utilities — and your debt-to-income ratio, then make their own assessment.

The key things to remember#

  • A loan affects your score at application, during repayment, and at settlement.
  • Keep to around 10 credit applications a year.
  • Use speculative applications and soft searches when comparing rates.
  • A loan diversifies your credit mix, which lenders like.
  • Payments are recorded as late from one day overdue.
  • A notice of default gives you 14 days; a satisfied default still costs you for six years.
  • Paying off a loan causes a temporary dip — expect it and don't panic.