How does applying for a personal loan work, and when does it hit your credit?

Summary

Discover, Upgrade and Avant all let you see a rate without affecting your credit score. The hard inquiry, which can lower it, comes later, and the lenders put it at different points: Discover when you move from the rate check to a full application, Upgrade only when the loan is funded. Before you sign, the lender must hand you a written disclosure that shows the APR, the finance charge, and where every dollar of the loan goes.

Three stages, and where the credit check lands

  1. Checking your rate. Discover says this "won't impact your credit score." Upgrade says it uses only a soft inquiry. Avant says checking your loan options does not affect your credit score.
  2. Applying or accepting an offer. At Discover, going ahead with an application means consenting to a hard inquiry that will appear on your credit report. At Upgrade, accepting your offer is still a soft inquiry.
  3. Funding. Upgrade runs the hard inquiry here, when the money is actually sent.

The CFPB explains why the order matters. Hard inquiries usually follow an application for credit and affect your score, because most scoring models look at how recently and how often you have applied. Soft inquiries, such as prescreening by lenders or you pulling your own report, don't affect scores and are visible only to you.

What the lender weighs

According to the CFPB, most lenders set the rate and terms on a personal installment loan using your credit score and reports, income, debts, the amount and length of the loan, the interest rates state law allows, and other factors such as your bank account transactions.

Published requirements are usually narrower than that list. Discover asks for at least $25,000 in individual or household income, an age over 18, and a valid Social Security number, and it says approval depends on confirming your income, debt-to-income ratio, credit history, and application details. The DTI article shows how that ratio is calculated.

The paperwork before you sign

Regulation Z requires the lender to give you the disclosures before the loan is consummated, in writing, in a form you can keep. The terms "finance charge" and "annual percentage rate" have to stand out more than anything else on the form except the lender's name.

The lender also has to itemize the amount financed, or tell you in writing that you can ask for the itemization. It separates money paid to you directly, money paid to others on your behalf, and any prepaid finance charge. If a consolidation loan sends cash straight to your card issuers, or a fee is taken off the top, those amounts appear on separate lines. The article on reading a final offer goes through the form line by line.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pricing pages on the dates shown. We have not used these products. Corrections: contact form.