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 fast pace. What if you found yourself this windfall and wish to pay the total amount owed. Is it best to get it over with before you blow your cash on something that’s not important? One thing to remember, installment loans are like payday advances. They have high-interest rates and can stick with you for years. It’s not unreasonable to make paying off a personal loan your number one priority.
Direct 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 settle the debt 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). It will improve your reputation with your online direct lender as 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 An Installment Loan Early:
- No more Interest Payments
A direct installment lender has a standard period within which they expect a borrower to pay back the amount owed. The idea is for someone 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 is a reminder of what you owe. Do you have extra cash and want to put it to good use? You could offset your outstanding online installment loan and focus on the other financial notes 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 direct installment lenders are vindictive when it comes to collections. You can see examples on the latest FTC reports. Especially when you default and all collection efforts fail. They report you to the big three credit bureau companies. This could lead to a negative rating on your credit score and it takes a long time to fix these issues. A credit score of less than 600 is detrimental for you. Especially if you plan to take out a mortgage or car loan. Having a negative credit score is one reason why consumers often need to turn to high interest loans such as payday and cash advances.
- More Disposable Income
With one less loan to worry about, 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 direct lender loan. There’s also the option of using that extra disposable income to further pay down other financial obligations. Some people may choose to spend the extra windfall on entertainment. Others will continue to use credit cards and bank loans. But it’s more prudent to get out from under any other outstanding loans.
- Cons Of Early Payment
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 it’s not smart to miss on credit card payments and other more important financial matters. It is only advisable if you came into a large amount of money if you use it in a smart way. 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 on your account. Being fiscally responsible gives you credibility with lenders. Besides, online installment loans are quite predictable, with a stated period of repayment and interest. 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 Making Early Payments On An Installment Loan Are Clear
Paying off an online installment loan is going to give you peace of mind. There will be less interest in the long run than you would expect with the best online loans. Especially since you will likely not be charged for early repayment. Having said that, there’s nothing wrong with repaying the monthly balance as it falls due. Ideally, you will have taken out a loan with a reputable installment direct lender in your state. By working with a licensed lender you will know they follow the law and will work with you if things go bad. Much like a payday advance, you will deal with huge finance charges but meet whatever financial emergency you’re dealing with. 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.
Tim has been working in the personal financing industry for well over a decade. Before that he managed his own team of mortgage professionals at a top lender in California. Now that Tim is firmly entrenched in the online lending industry he’s looking to share his industry expertise and experience.