Is paying up a personal loan early good for your credit score?

Do you want to pay your personal loan early and save money? Well, yes, you can. It brings down the amount you owe totally and boosts your credit score. Additionally, by paying off a loan early, you save on a huge interest. It simultaneously lowers the total loan payment. 

However, it is not as easy as it seems. Mere negligence on your part may cost you double. It may affect your credit score in that case. The blog details the effects of paying the loan early on your credit score. Individuals having one or considering a personal loan may benefit from this.

Are you allowed to pay a personal loan before the date?

Yes, and no. Most loan providers allow you to pay the dues early, while some don’t. Instead, they impose a pre-payment penalty if you do so. It increases the overall costs you must pay on the loan. Thus, it is always better to know your options. Consult your loan provider to know whether you can pay off the dues early without incurring additional charges.

Most genuine providers will help you counter that. They keep the terms transparent for you to understand. Thus, always read the fine print before taking any action regarding the loan payments. Additionally, analyse your credit report and check the dues on your existing personal loan. View aspects like:

• How much money have you paid on the loan until now?
• How much money do you still owe on the loan?
• What are the interest charges on the loan?
• Are there any early repayment or pre-payment charges?

Additionally, making the early loan payment depends on the type of loan you have. You may not get one on the long-term loan that hosts whopping interest rates. Alternatively, if you decide to pay the loan early, re-calculate the amount. You get up to 298 days to decide whether you can pay early or not. At this time, the loan provider may re-calculate what you owe.

What are the pros and cons of paying a loan early?

Yes, there are pros and cons of using any loan. Well, personal loans do more good than harm your personal finances. Here are some pros and cons of paying an unsecured personal loan early:

Pros of Paying Personal loan early

If you are willing to save more money, paying off a personal loan early may be beneficial. For example- you work as a seasonal worker and get a lump sum anytime. Thus, you want to make the best use of this money. Thus, you may consider paying the loan early. It will get you debt-free and improve your credit score.

For example- you have a personal loan of 30000 on which you have already paid 10000. You got the loan at a 10% interest rate with 3 years loan term. If you pay the remaining 20000 in a lump sum, you can save an estimated 6000 on interest over the remaining loan term.

Thus, clearing this amount ends the process of continuously budgeting for payment every month. Hence, it grants you a much-needed peace of mind. Instead, you can work on other goals like car ownership and use that money as savings.

Also, early loan payment improves your credit utilisation ratio, making you eligible for many low-interest credit cards, mortgages, and other benefits. It helps you qualify without worrying about application rejection. Precisely, early repayment helps you save interest and improves credit and financial well-being.

Cons of paying a personal loan early

While paying off a personal loan debt helps drop the financial load, it may have some disadvantages, too. These may affect you in some unexpected ways. Eventually, your finances may hit the rock bottom. It is the reason you must stay vigilant before repaying the loan early.

For example- paying a loan early may have some repercussions like a pre-payment penalty. Usually, you pay this along with the remaining pending amount. Check your repayment document carefully and scan for such costs. It may entirely wash off the profits you expected from the early repayment.

If you are eager to pay the dues early, check a loan provider that allows it. Reassure the benefits before applying for the loan. It frees you from the worries regarding the loss.

What is the possible impact of pre-payment on credit score?

Although it may seem counter-intuitive to pay a personal loan early if you have the capacity, however, the results don’t turn up as expected always. For example- paying a long-term personal loan affects your payment history. It is an instalment loan where you repay the dues for years on a particular date. This process repairs your credit history and score. Paying the loan early reduces the credit history. It thus affects your credit score temporarily. Thus, if you want to build a credit rating, never pre-pay the amount.

Pre-payment on the loan also affects the credit mix. It includes the variety of debts that you hold in your credit profile. For example – credit cards, payday loans, mortgages, student loans, etc. Personal loan holds a comprehensive part of the mix. That’s why paying it off may hit your credit score. However, making regular payments on the other liabilities can help you repair it quickly.

What should you check before paying off a personal loan early?

Knowing a few aspects is important before paying up a loan before the due date. Suppose you cannot pay later but want to now, negotiate the rate. Check whether the loan provider may help you here. It will also help you save money.

Alternatively, if not full, check whether you can pre-pay half the amount due on the loan. It especially helps you save whopping interest on a greater personal loan. What could be better than saving £5000 or more interest on a 7-year loan term?

Next, compare whether the early repayment costs outweigh the early repayment profits. If yes, then it would not be the best solution. For example- most loan providers charge extra if you pay over £8000/year. Thus, check the difference between clearing the loan early and penalties. Go ahead only if the agreement helps you save money.

Lastly, check whether you can fetch a better rate by refinancing the existing loan. It is only possible if the current market interest rates are lower than what you have on a personal loan. If yes, you can lower the total monthly amount to pay and interest costs.

Bottom line

Thus, paying up a personal loan early could be good and bad for your finances. It may help you improve your credit score. At the same time, if not allowed, you may face the reverse impact. It is just about acknowledging yourself with the pros and cons of paying the personal loan early and acting accordingly. Address the extra charges or pre-payment penalties before paying before the date. It may affect your financial well-being. If not mentioned, confirm the costs from the provider.