Business Desk – Loan Prepayment Tips: After taking out a loan from a bank, many people, when they have additional funds, resort to loan prepayment, meaning they repay part or all of the loan balance before the due date. This reduces the interest burden and allows the person to become debt-free sooner. However, many people wonder whether prepaying a loan immediately increases their CIBIL or credit score?
The simple answer is: not necessarily. Prepaying a loan is considered a financially sound decision, but its impact can vary depending on each individual’s credit profile.
Does loan prepayment increase credit score?
Prepaying your loan doesn’t immediately increase your credit score. Your credit score isn’t determined solely by the number of loans you take out or close. Many other factors also play a role in determining it.
If you have a good history of paying EMIs on time, have low outstanding debt, and have used credit responsibly over time, this can have a positive impact on your score. However, it’s not necessarily true that simply repaying your loan early will boost your score.
What factors determine CIBIL Score?
A credit score is based on several financial behaviors. These include EMI and loan repayment history, total outstanding debt, length of credit history, number of new loan or credit card applications, and credit utilization ratio. This is why the impact of loan prepayment can vary for different individuals.
What are the benefits of loan prepayment?
The biggest advantage of prepaying your loan is that it reduces your total debt. If you repay the entire loan, you no longer need to pay EMIs every month.
This reduces the pressure on your monthly income, saves on interest costs, and leaves more money available for future investments or other important expenses. It also reduces the risk of missing EMIs or defaulting.
What to do if you want to increase your credit score?
If your goal is to improve your CIBIL score, simply making loan prepayments isn’t enough. It’s crucial to pay all loan EMIs and credit card bills on time. Avoid delays or defaults on any payments. You should also avoid applying for new loans or credit cards excessively. A good payment history strengthens your credit score in the long run.
What is the difference between Closed and Settled Loan?
After repaying your loan, be sure to check your credit report. Your loan status should show “Closed,” not “Settled.” “Closed” means you’ve paid off your entire balance and your loan is completely settled.
Settled means the bank closed the loan based on an agreement without receiving the full amount. This status can negatively impact your credit report and make it difficult to obtain a new loan or credit card in the future.
Are there any disadvantages of closing the loan early?
If you only had one active loan and you closed it completely, in some cases your active credit history may be reduced. People with very short credit histories may see a slight impact on their credit scores.
However, it’s not wise to continue to hold onto a loan unnecessarily just to maintain your credit score. If you have the ability to repay the loan, becoming debt-free is a better option.
