Should I Repay My Loan Early?

June 9, 2021

Can you pay off your loan early? Absolutely. Should you? That entirely depends on your personal circumstance. There are several factors to consider surrounding your situation and motives. Many who take out bad credit loans in the UK may think that paying them back early will improve their credit score, but this is not always the case. Often, it will not worsen or help your credit score, but it depends on a variety of factors.


Does Paying Off a Loan Early Hurt Credit?

If you are considering paying off your installment loan early, perhaps put some thought into it beforehand. If you can keep it open, you could prove that you have a solid history with on-time payments. Keeping your loan open and managing it correctly can show creditors that you have the ability to consistently maintain the account responsibly over a longer period of time. You should always check your loan agreement before deciding to pay it back early. Check your loan agreement for any prepayment penalty charges, which are fees that are owed if you do decide to pay the loan off before the loan term ends. Lenders do this at times as a form of insurance, so they can regain some of the interest they will lose if you pay it off before you need to. 


Does Paying Off a Loan Build Credit?

Yes, paying off a loan will help you build credit, but that’s not to say that paying it off any earlier will have any benefit. 35% off your credit score is based on timely payments, so if you do this overtime it will enhance your credit score drastically. Additionally, a key rule to follow is to use no more than 15% of your available borrowed credit, ideally between 5%-10%.  For example, if your borrowed credit limit is £1000, ideally spend between £50-£100 a month on your card, before paying it back in full at the end of the designated time frame. It will not make a huge amount of difference whether you pay it off before the due date, or on the due date. Timeliness only comes into account when it’s in terms of before the due date. 


Will paying off your loan put you at risk?

If you use all of your savings just to pay off your loan, this is not the wisest of decisions. You may as well allow your credit score to grow while making timely payments. Don’t diminish your ability to deal with a financial emergency if it arises. If your savings are slim, you might want to make sure you aren’t putting your finances, along with your ability to maintain your clean credit history, at risk by paying your loan off in a lump sum.

Paying off a loan early comes down to your personal situation and how the move will affect your finances. If it will impact your overall well-being, perhaps reconsider. If you’re concerned about how it will impact your credit, consider finding out where your credit score and history stand before making any further steps. 

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