Will Paying Off An Installment Loan Early Improve My Credit?
Whenever you have an outstanding installment loan, there is this nagging feeling at the back of your mind. You know that your finances are tied up until the loan is completely paid off. Online installment loans are quite flexible, affording you enough time to put things together and pay off at a leisurely pace. What if you found yourself this windfall and wish to pay off your installment loan and get it over with before you blow off your fortune on shoes and electronics?
Installment loans can be great in the right situation. With most loans there’s a set contract and the borrower will pay what they owe at the agreed upon pace. You have no obligation to pay off early, but you can. Most online lenders will not penalize you for deciding to make early payments on a loan. If anything, it will benefit your credit score (as they report to the Big Three), and it will do your reputation with your online lender well. Remember this may not be your last loan request with them, and you want to be on your best behavior so that the terms remain favorable.
Benefits Of Paying Off Your Installment Loan Early
- No more Interest Payments
The lender has a standard period within which they expect you to pay them back. The idea is to pay part of the principal and the interest accrued. If you repay all your interest in a period lesser than what you had agreed, you will save yourself some good money in interest. You find that you only end up paying half of it.
- Peace of Mind
There is nothing as nagging as having a creditor at your neck. Every email, however friendly is a reminder of what you owe. If you have extra cash and think that it is not a good idea to keep it around, you could offset your outstanding online installment loan and focus on the secured loan such as mortgage and car loan. You will sleep easier for it.
- Improved Credit Ratings
If you thought that defaulting an installment loan would not ding your credit score, think again. Online lenders can be a bit vindictive, especially when you default and all their collection efforts fail. They report you to the three major credit bureaus, Equifax, Experian, and TransUnion, which could lead to a negative rating on your credit score. A credit score of less than 600 is detrimental for you especially if you plan to take out a mortgage or car loan.
- More Disposable Income
With one less loan to pay off, you will have more disposable income. You can travel, shop more, or even try out that new restaurant in town. You will have more financial freedom knowing that your money is not committed to a loan. There’s also the option of using that extra disposable income to further pay down other loans. While some people may choose to spend the extra windfall on entertainment of luxuries, it’s more prudent to pay off any other outstanding loans.
While paying off your installment early gives you peace of mind, it is not advisable to kill yourself trying to get the cash for it or to miss on credit card payments. It is only advisable if you came into a large amount of money and you need to use it wisely. Otherwise, keeping your installment account open by paying your monthly bills as they fall due could be beneficial. To build credit, you have to keep your credit lines open and service them on a timely basis. Consistent and timely repayment reflects positively on your account and gives you credibility with lenders. Besides, installment loans are quite predictable, with a stated period of repayment. They are less risky than credit card debts and therefore the benefit to your credit score may not be meaningful. Unless you have extra income, you are better off paying it as it falls due.
The Benefits of Pre-paying Installment Loans Are Clear
Paying off an online installment loan is surely going to give you peace. There will be less interest in the long run, especially since you will likely not be charged for early repayment. Having said that, there’s nothing wrong with repaying your loan as it falls due. As long as you make monthly payments as required by your lender, you will not have to worry about lowered credit scores. Actually, your open installment account will give you a higher credit score than your fully paid account. The vital thing is to be consistent and never miss a payment.