Credit Score: Does taking out a new loan negatively impact your credit score?

Many people hesitate before applying for a new loan because they fear it may damage their credit score. While it is true that loan applications can influence your credit profile, the actual impact is often misunderstood. A new loan may temporarily reduce your score, but when managed responsibly, it can actually strengthen your creditworthiness in the long run.

Why Your Credit Score Drops After a New Loan Application

Whenever you apply for a loan, the bank or NBFC conducts a detailed review of your credit report. This process is known as a hard inquiry.
A single inquiry does not significantly hurt your score. However, if you submit multiple loan applications within a short time, lenders may assume you are under financial stress or urgently need funds. This perception can lead to a temporary dip in your credit score.

Your Total Debt Increases After Loan Approval

Once your loan is approved, your overall debt burden rises.
Credit scoring systems consider increased debt as a risk factor, which is why your score may fall by a few points immediately after approval. This dip is normal and happens due to system-based calculations — not because the lender views you negatively.

However, this decline is usually short-lived. The real impact of a loan depends on how consistently and responsibly you repay it.

Timely EMI Payments Can Improve Your Credit Score

If you repay your EMIs on or before the due date each month, the new loan can actually become beneficial for your credit profile. A strong repayment history is one of the most important factors in credit scoring models. Every on-time EMI adds to your record of financial discipline, helping your score rise gradually.

For individuals with little or no credit history, taking a small personal loan or a consumer durable loan can help establish a positive credit trail.

Too Much Borrowing at Once Can Backfire

Your overall borrowing pattern matters just as much as timely repayments.
For instance, imagine you recently purchased an expensive gadget using your credit card, took a travel loan, and are now planning to apply for a personal loan.
Even if you pay your EMIs on time, your credit report will show heavy credit utilization and increased financial pressure. This can affect your credit score negatively.

That is why financial experts advise planning your loans carefully instead of taking multiple credit products within the same year.

How Many Loans Are Too Many? It Depends on You

There is no fixed number that defines how many loans are “too many.”
The acceptable limit varies based on:

• Your monthly income

• Your repayment capacity

• Your credit card utilization ratio

• How comfortably EMIs fit into your monthly budget

If your credit card utilization is already high, taking a new loan may further lower your score. Likewise, if multiple EMIs strain your income, lenders may view you as a high-risk borrower.

The Bottom Line

Applying for a new loan can cause a minor, temporary decline in your credit score, especially if you already have high outstanding debt or multiple inquiries within a short period. But if you manage repayments responsibly, a new loan can actually help strengthen your credit score over time.

In simple terms:
A new loan isn’t harmful — mishandling it is.
Plan your credit wisely, repay on time, and maintain a balanced borrowing pattern to keep your score healthy.