paying off loan early to help credit score?

gill37

I have taken out a loan over 10 months with Barclays. If I pay it off early - say in 4 months - will it help my credit score or should i pay it over the full 10 months.

gill

jamesd

A history of on time payments will typically improve your credit score, so it's to your advantage to have the loan running for the whole term.

It's not necessary to have the whole amount borrowed for the whole term. You have a legal right to make overpayments to clear it faster, either partially or completely. So you can clear all but say £20 and leave that £20 to run to term to get the positive effect without any interest on most of the money.

pheonixrising21

jamesd wrote: »

A history of on time payments will typically improve your credit score, so it's to your advantage to have the loan running for the whole term.

It's not necessary to have the whole amount borrowed for the whole term. You have a legal right to make overpayments to clear it faster, either partially or completely. So you can clear all but say £20 and leave that £20 to run to term to get the positive effect without any interest on most of the money.

I may be wrong, but as I understand it with most loans, an overpayment will not affect the monthly payment amount, but rather the term of the loan. So in your example of leaving £20 over the remaining 5 months the payments will not reduce to £4 + interest per month, but rather stay at the initial rate. This will mean that the next payment will pay off the loan anyway.

It may be worth clarifying this with the lender.

However, there is a benefit to doing it this way, in that you get around the early settlement fee (usually a couple of months interest).

Also, IMO, it would be better to pay it off early if you can and save the interest

jamesd

It's possible for a partial settlement to reduce the term but it's not something I think is normal. It's a fixed term loan agreement so extra payments shouldn't be affecting the term. But worth checking to ensure that a particular lender handles it as desired.

If you want an improved credit score, paying it all off early is the wrong way to go because that loses you the extra credit history. But paying off most of it eliminates most of the interest cost, so you end up paying only a little for that benefit.