Many borrowers assume that
closing a personal loan—whether by completing the full tenure or opting for early repayment—
automatically improves their credit score. While timely repayment generally helps, the reality is a bit more nuanced. Here’s a detailed explanation.
1. Types of Loan Closure
a) Standard Loan Closure
· Repaying the loan as per the
original schedule.· All EMIs are paid on time until the loan tenure ends.
b) Pre-Closure / Foreclosure
· Paying off the
entire outstanding loan amount before the tenure ends.· Banks may charge a
prepayment penalty in some cases.
2. How Loan Closure Impacts Credit Score
Positive Effects
1.
Timely Repayment Historyo Completing EMIs on time strengthens your
repayment history, a major factor in credit scoring.2.
Reduced Debt Burdeno Closing a loan lowers your
total outstanding debt, improving your
debt-to-income ratio.
Potential Neutral / Slightly Negative Effects
1.
Shorter Active Credit Historyo Credit scores also consider the
average age of active loans.o Closing a long-term loan early may slightly
reduce the length of credit history, which could have a
minor short-term impact.2.
Loss of Regular Payment Track Recordo Active loans showing consistent EMIs are sometimes viewed positively; closing them removes this ongoing history.
3. Timing Matters
·
Full-term closure usually has a
positive effect, as it demonstrates
consistent repayment behavior.·
Early closure can also be beneficial if you maintain other active credit lines, but if all accounts are closed simultaneously, it may temporarily reduce your
credit mix, slightly affecting the score.
4. Other Factors to Keep in Mind
· Always request a
No Objection Certificate (NOC) from the bank after closure.· Check your
credit report within 30–60 days to ensure the loan is marked as
“Closed” or “Paid”.· Avoid
simultaneously closing multiple loans if you rely on credit score for new loans or credit cards.
5. Bottom Line
Closing a personal loan
usually improves your creditworthiness in the long run, especially if you:· Pay EMIs
on time· Avoid defaulting at any stage· Maintain a
healthy mix of active and closed accountsTip: Early repayment can save interest but ensure you continue using
other credit responsibly to maintain a healthy score.
Disclaimer:The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.