How Does a Loan Application Affect Your Credit Score?

A loan application is a form that requires borrowers to submit a variety of financial documentation. This includes identifying documents, pay stubs and two years of federal tax returns.


A credit score is a three-digit number that rates your credit history. It factors in the consistency and timeliness of your bill payments, how much credit you use versus the amount of credit available to you and other relevant information.

Credit Score

A lender needs to assess your creditworthiness to decide whether to offer you a loan, and a part of that process involves running a hard search on your credit file. This has a small adverse impact on your credit score. Lenders use credit scores to judge your reliability as a borrower, and they want to know that you can be counted on to repay any debt you take out. If you make multiple applications in a short period of time, lenders may see that as risky and your credit score will suffer.

A three-digit number that rates a consumer’s credit usage and history, a credit score is used by lenders to determine whether to lend money and at what interest rate. A range of factors are used to calculate your credit score, including your payment history (which includes retail accounts, finance company accounts, mortgages and installment loans), public records and judgments, liens and garnishments. A history of prompt payments improves your credit score, while late payments hurt it.

While a full loan application will always have a slight, but temporary, impact on your credit score, you can avoid this if you use an eligibility checker before applying for a loan. These do a soft inquiry and won’t lower your credit score. However, you should still check terms carefully to ensure you meet the criteria and are likely to be approved before making a full application.

Debt-to-Income Ratio

Your debt-to-income ratio is one of the most important factors lenders consider when approving your loan application. It measures how much of your monthly income goes toward paying debts, including mortgage payments, auto loans, student loans and credit card balances. It’s calculated by adding up all your monthly debt payments and dividing them by your gross monthly income, which is the amount of money you earn each month before taxes.

A good DTI is usually below 43%, although this will vary from lender to lender and will also depend on the type of loan you’re applying for. A high DTI may result in you being labeled as “house poor”, which is a term used to describe homeowners who spend a large percentage of their monthly income on housing costs, such as the mortgage payment, homeowner’s insurance and real estate taxes.

To improve your DTI, you can pay down any outstanding debt balances or increase your gross monthly income. You can also try to qualify for a secured loan, which is typically backed by collateral, such as a home or car. Secured loans have lower credit requirements than unsecured ones and can be an option for borrowers with a high DTI. However, it’s important to note that a higher DTI can affect the terms and interest rate of your loan.


Collateral is an asset that a loan applicant pledges to a lender in exchange for financing. It can be tangible (like a car or a house) or intangible (such as future cash flow for a business). Collateral reduces the risk to lenders and often enables borrowers to access larger loan amounts and lower interest rates than they would otherwise qualify for, particularly when their credit is less than perfect.

In addition to reducing the lender’s risk, collateral also helps borrowers build credit, provided that they are responsible with repayment. This is because timely repayment reports to the main consumer credit bureaus help establish a positive payment history, which accounts for 35% of your credit score. If you default on a collateral-based debt and your lender repossesses the assets, it will negatively impact your credit score.

The type of collateral you can pledge varies by lender, but it typically must be an item that is easy to value and turn into cash, such as a savings account or a car. The lender will take possession of your collateral if you fail to make payments and will likely sell it to cover the outstanding debt amount. Using a collateral loan as a way to establish or rebuild credit can be a great strategy, but it is important to shop around for the best rates before officially applying.


Application fees are one type of fee that borrowers might be charged for making a loan application. These up-front charges are typically nonrefundable and vary by lender. Some lenders do not charge application fees at all, while others might charge them only for certain types of loans such as mortgages.

Other types of loan fees include origination fees. These are used to cover the costs associated with processing and underwriting a loan. They can vary by lender and loan type and may be rolled into the total cost of the loan and paid over time or deducted from the amount borrowed. Origination fees are more common for commercial real estate loans than personal or auto loans.

Lenders can also charge legal or document preparation fees, which are used to cover the costs of preparing loan documents, conducting regulatory due diligence and reviewing legal issues for new and existing loans. These fees are usually based on the complexity of the loan and might also be charged for loan refinancing.

It’s important to compare loan fees before applying for a loan. This can save borrowers hundreds or even thousands of dollars. In addition, borrowers should be wary of lenders that do not provide their customers with a written estimate before charging any fees. This is in violation of the Truth in Lending Act.