Early repayment of a loan may seem like a smart financial decision, but it’s important to consider its impact on your credit profile. While early repayment can provide you relief from paying loan amount every month, it may also affect your credit score positively or negatively. Before making an early payment, understand a few key factors that can help you make an informed decision.

Key Factors to Consider Before Making an Early Repayment

Here are some key factors to consider that can positively or negatively impact your credit score. 

1. Payment History: This records all your past and current payments to lenders, including on-time, late, and missed payments. It plays a major role in your credit score, making up more than 30% of the total. 

2. Credit Mix: This refers to the different types of credit you have, such as credit cards, personal loans, and mortgages. Lenders prefer borrowers who can manage multiple types of credit responsibly.

3. Prepayment Penalty: Few lenders charge a prepayment penalty when a borrower pays off a loan before the agreed-upon end date. So, make sure that you speak to your lender before making the payment.

4. Length of Credit History: Credit history is the length of time you've had credit accounts open and how you've used them. 

How Does Paying Off a Loan Early Affect Your Score?

Paying off a loan ahead of schedule can feel like a major financial win—it reduces the interest you owe, lowers your debt-to-income (DTI) ratio, and provides greater financial flexibility. A lower DTI makes you more attractive to lenders, signaling responsible money management. However, the impact on your credit score isn’t always immediate or entirely positive. Since an active loan contributes to your credit mix and payment history, closing it early might cause a temporary dip in your score. That said, responsible debt management always leads to long-term financial stability. Before making an early repayment, it’s important to consider factors like interest rates, loan terms, and potential prepayment penalties to ensure it aligns with your overall financial goals. But at Borrowera, we don’t charge prepayment penalties, allowing you to repay your loan on your terms without extra costs.

Moreover, if your loan has a low interest rate, paying it off early might not be the best choice. It’s usually better to focus on paying off high-interest debt first since it saves you more money in the long run. The best approach is to choose a repayment plan that fits your financial goals while keeping your credit score strong.

Conclusion

Paying off a loan early can feel like a big financial win, but it’s important to analyse the pros and cons. While it saves on interest and improves financial stability, it may not always boost your credit score right away. The key is to choose a repayment plan that fits your long-term goals and your pocket. 

Also Read: Part Payment in Short-Term Loans: A Smart Way to Reduce Debt