What happens if you pay off an installment loan early?
On the one hand, you save money on accruing interest when you pay off a debt early, and your debt-to-income ratio will go down. However, some lenders charge a prepayment penalty for early payments, and using your spare income to pay off your loan early means it won't be available for other expenses.
But when you pay off an installment loan, it appears as a closed account on your credit report. Closed accounts aren't weighted as heavily as open accounts when calculating your FICO score, so once you pay off your personal loan, you'll have fewer open accounts on your credit report.
If you find you have a bit more money in your account you might decide to repay your loan early. This could mean you end up paying back less in interest in the long term. It's important to remember that if you repay your loan early, you will be charged an Early Repayment Fee.
Yes, it can be a good idea to repay your personal loan early as you will be charged a less interest on the loan amount. Also, once you clear your loan early, not only will you be able to save considerable, but your overall credit score will also improve allowing you to avail another loan if necessary.
VantageScore® 3.0 and 4.0, the most recent versions of scoring software from the national credit bureaus' joint score-development venture, ignore all paid collections and all medical collections, whether paid or unpaid. As a result, those accounts will not affect your VantageScore.
Creditors like to see that you can responsibly manage different types of debt. Paying off your only line of installment credit reduces your credit mix and may ultimately decrease your credit scores. Similarly, if you pay off a credit card debt and close the account entirely, your scores could drop.
Your credit score may dip
The length of your credit history and your credit mix are two factors that affect your credit score. Paying off an installment loan that's your oldest form of credit or the only installment credit you have (as opposed to credit cards' revolving credit) could cause your score to go down.
Accounts you didn't pay, like a charged-off credit card or installment loan balance, can stay on your credit report for seven years from the date the debt was charged off. A charge-off is when the creditor officially writes your debt off its books as a loss.
An installment loan can help you finance a major purchase, such as a car or home. Like any loan, there are pros and cons to consider. Advantages include flexible terms and lower interest rates than credit cards, while a major disadvantage is the risk of defaulting on the debt if you're unable to repay it.
Paying your credit card early does not affect your credit score in and of itself, but how it impacts your other finances does. If you pay your bill early and lower your credit utilization from 70% to 30%, that can have a positive impact on your credit score.
Why would you pay off a loan early?
If you have extra money, paying down your debt can help your finances, no matter what type of loan you have. However, it's also true that your extra money could be more useful elsewhere, too. Before you pay off a loan early, it's a good idea to make sure that you have an emergency fund in place.
Expert-Verified Answer
Paying off an installment loan early can result in a prepayment fee, adjusted interest, or the charging of full interest, depending on your loan agreement.
Prepayment penalties
The lender makes money from the interest you pay on your loan each month. Repaying a loan early usually means you won't pay any more interest, but there could be an early prepayment fee. The cost of those fees may be more than the interest you'll pay over the rest of the loan.
Why credit scores can drop after paying off a loan. Credit scores are calculated using a specific formula and indicate how likely you are to pay back a loan on time. But while paying off debt is a good thing, it may lower your credit score if it changes your credit mix, credit utilization or average account age.
Collections accounts generally stick to your credit reports for seven years from the point the account first went delinquent, even if the account has been paid in full. But you may want them off sooner than that because unpaid collections can make you look bad to potential creditors.
Paying off debt can lower your credit score when: It changes your credit utilization ratio. It lowers average credit account age. You have fewer kinds of credit accounts.
People often see their credit scores drop after paying off debt due to a change in the types of credit they have, an increase in their overall utilization or a decrease in the average age of their accounts.
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
The Bottom Line
Once you've gotten there, keep it simple by focusing on your balances with the highest interest rates first, which will generally be credit cards. The same interest rate strategy applies when you're determining the best order in which to pay off your loans.
Unfortunately, you can't cancel or return the loan, but you can pay it back early. You can make a lump sum payment for the excess amount through your account with your loan servicer. However, you will have to pay the accumulated interest and fees.
Which debt to pay first?
Prioritizing debt by interest rate.
This repayment strategy, sometimes called the avalanche method, prioritizes your debts from the highest interest rate to the lowest. First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on.
If you would like to pay for your upcoming instalments in advance, you can contact the bank/card provider of your instalment payment. Your request for early repayment is subject to the approval of your bank or card provider.
