How Unsecured Personal Loans Affect Your Credit Score (Before, During, and After a Loan)

We want to cut through the noise and explain how an unsecured personal loan can shape your credit score in Australia. The headline is simple. A personal loan can help your score if you manage it well, and it can hurt your score if you do not. The details matter. In this guide we walk through what happens before you apply, during the life of the loan, and after you close it. We also compare unsecured and secured loans, and set out practical steps you can take to protect and grow your score.

Credit scores in Australia at a glance

Your credit score is a number that reflects what is in your credit report. Australia uses comprehensive credit reporting, which means lenders and credit reporting bodies record both negative and positive data. Scores typically range up to 1,200 depending on the bureau. Higher is better. The big credit reporting bodies are Equifax, illion, and Experian. Lenders use your score and report details to assess applications, set interest rates, and decide credit limits.

Key inputs that influence your score include applications for credit, repayment history on eligible accounts, the types of credit you use, the age of your accounts, and serious events such as defaults or court judgments. A personal loan will touch several of these inputs at different stages.

Unsecured personal loans vs secured personal loans

A personal loan lets you borrow a set amount and repay it over a fixed term with regular repayments. An unsecured personal loan does not require collateral. A secured personal loan is backed by an asset such as a car. Because there is no collateral, unsecured loans generally attract higher interest rates and tighter eligibility settings. The trade off is speed and flexibility. You can use an unsecured loan for many lawful purposes such as rental bond, education, medical, furniture, travel, or debt consolidation.

A secured loan can be cheaper because the lender can claim the asset if you default. Default on a secured loan can lead to repossession. Default on an unsecured loan does not involve an asset, but it can still trigger collection activity, default listings, and potential legal action. From a credit score angle, repayment behaviour on both loan types is recorded. Collateral does not insulate your score. Timely payments do.

Before you apply for an unsecured personal loan

Applying for a loan creates a hard enquiry on your credit report. A hard enquiry may nudge your score down in the short term. One enquiry is not a crisis. Clusters of enquiries in a short window can signal risk. If you need to compare options, use eligibility checks or rate estimates that rely on soft enquiries, or narrow your shortlist before you submit a full application.

Checking your own report does not hurt your score. We recommend you review your credit report every 3 months and correct any errors with the bureau and the credit provider. Confirm your personal details, addresses, and account histories are accurate. Make sure any paid defaults show as paid. If you have existing high interest debts such as credit cards, consider whether a consolidation loan could lower costs and simplify payments. Lenders also look at your income, expenses, and existing commitments to test affordability under responsible lending laws.

Smart preparation

Use these steps to prepare your application without unnecessary score damage.

1. Order a free credit report and score from Equifax, illion, or Experian and dispute any errors.

2. Set a realistic borrowing amount and term that fits your budget and leaves room for rate rises.

3. Compare lenders by comparison rate, fees, flexibility, and hardship support rather than headline rate only.

4. Use a pre qualification tool that does not record a hard enquiry where possible.

5. Submit a single clean application with complete documents instead of several applications in quick succession.
   

During the life of the loan

Once your loan is open, your repayment behaviour becomes the core driver of credit score outcomes. Comprehensive credit reporting records whether you pay on time. Consistent on time payments can lift your score across the term of the loan. Late or missed payments can pull it down. Your goal is simple. Pay the agreed amount on or before the due date every time.

How repayment history is reported

Repayment history information usually captures whether your payment was made on time or how many days late it was. A payment that is 14 days late will typically be recorded as late. A pattern of late payments is more harmful than a single slip that is promptly corrected. Set up direct debits, calendar alerts, and a buffer in your transaction account to reduce the risk of missing a due date.

If you fall behind by 60 days or more on an amount above the minimum legal threshold, the lender may list a default on your credit report after giving required notices. A default can remain for 5 years and will weigh on your score even after it is paid. Paying it will still help, since lenders can see the status as paid and may view it more favourably than an unpaid default.

Early repayments and extra repayments

Many unsecured loans let you make extra repayments or pay out the loan early. Extra repayments reduce interest costs. From a score perspective, early payout ends the stream of positive on time marks sooner, but that is usually not a problem. Lower debt is positive for your overall borrowing position. Check for any early payout fees before you act.

Debt consolidation and score impact

Using a personal loan to consolidate credit cards or store cards can support your score if you close or lower the limits on the old products and keep up perfect payments on the new loan. The positive effects come from fewer accounts, clearer repayment progress, and less temptation to revolve balances. The negative risk is opening a new loan and then rebuilding balances on the old cards. The fix is discipline. Close or significantly reduce those card limits once the consolidation is complete.

Hardship support

Life happens. If you experience a setback, contact your lender early and request assistance under hardship provisions. A hardship arrangement can change your repayments for a period. If you keep to the varied terms, your report should reflect that you are up to date. This is almost always better than falling into arrears or default. Speak to a free financial counsellor through the National Debt Helpline if you want independent guidance.

After you repay or close the loan

When the loan is paid out, the account will be closed and your report will show the end of the contract. A clean record of on time payments across the term is powerful evidence that you can manage credit. Closed accounts with good history can remain visible for a period and support future applications. If there were any late payments, focus on keeping the rest of your credit file spotless to dilute their effect over time.

You may notice a small short term shift in your score when an account closes because your active credit mix changes. This is normal and usually not a concern. The larger gain is the reduction in your overall debt and the proof of responsible behaviour.

Unsecured vs secured personal loans and other products

Both unsecured and secured personal loans report payment performance. Secured status does not shield your score from the effect of missed payments. Because secured loans are often cheaper, they can be easier to pay on time if the repayments fit your budget. If you default on a secured loan, repossession or sale of the asset can occur. That process is separate from score mechanics, but the default records will still harm your score.

Compared with credit cards, a personal loan has a fixed repayment schedule and a defined end date. That structure can be helpful for discipline. Credit cards are revolving and can tempt higher utilisation, which can correlate with greater risk. The reporting frameworks differ, but in both cases, on time payments and controlled balances are the main score friendly habits.

Buy now pay later services are now being brought under stronger credit rules. As reporting expands, applications and repayment behaviour may be more visible on your credit file. The safe rule is to treat every obligation as if it affects your score and to pay on time, every time. Student loans under HELP do not appear on your credit report, but lenders consider them when they calculate serviceability. That means your borrowing power can be lower if your income is reduced by HELP repayments.

Behaviours that help and hurt your score

Helpful habits

• Pay every instalment on or before the due date

• Keep your banking buffer so a direct debit does not bounce

• Reduce limits or close redundant cards after consolidation

• Check your report every 3 months and fix errors quickly
  

Risky habits

• Submitting several loan applications in quick succession

• Letting late payments roll into defaults

• Taking new credit while you are still settling a consolidation loan

• Ignoring early signs of hardship instead of contacting your lender
  

Governing bodies and who to trust for guidance

For clear, reliable guidance, quote or link to these bodies when relevant in your content or customer education.

• ASIC and its MoneySmart website for consumer credit education and calculators

• OAIC for credit reporting privacy and the Credit Reporting Privacy Code

• ACCC for competition and consumer law and updates on credit reforms

• AFCA for complaints and dispute resolution with lenders

• APRA for prudential standards that influence lending settings across banks and authorised deposit taking institutions

• Reserve Bank of Australia for the interest rate environment that feeds into loan pricing

Practical FAQs for general consumers and young adults

Will a personal loan always lower my score at the start

A small dip is common because of the hard enquiry and the new account. The effect is usually temporary. Positive repayment history can offset the dip within months.

Do extra repayments help my score

They help your finances by reducing interest and shortening the term. Score models do not reward extra payments directly, but an earlier finish is still a win. Make sure there are no early payout fees.

What if I miss one payment by a few days

Act quickly. Pay as soon as you can and, if needed, call the lender to explain. One slip that is promptly corrected is far less harmful than repeat lateness. Use alerts and direct debit to avoid a repeat.

How long does a default stay on my file

A default can remain for 5 years. If you pay it, the status updates to paid. Lenders may view a paid default more favourably than an unpaid one, but it will still weigh on decisions during that period.

Final word

An unsecured personal loan can be a useful tool for real life needs when used carefully. Your score will benefit from clean, consistent payments, a sensible loan amount, and limited applications. The same product can harm your score if payments are late or if you juggle too many new accounts at once. Plan the loan, prepare your documents, and maintain discipline across the term. If something goes wrong, communicate early and seek help. That is how you protect your score and keep your options open for the future.