Closing a personal loan is a big financial milestone. Whether youāre completing the full tenure or making a pre-closure, it can have a direct impact on your credit score. Many people assume that closing a loan automatically boosts their score ā but thatās not always true.
Hereās exactly how personal loan closure affects your credit score and what you should keep in mind.
1. Timely Loan Closure Boosts Your Credit Score
If youāve paid all your EMIs on time and close the loan as scheduled:
Your repayment history looks strong
Lenders see you as financially disciplined
Your credit score gradually increases
Why?
Payment history accounts for nearly 35% of your credit score.
2. Pre-Closing the Loan Can Slightly Reduce Your Score (Temporarily)
If you close your loan before tenure:
Your credit mix changes suddenly
You lose an active credit account
Your average credit age reduces
This may cause a small, temporary drop in your score.
But donāt worry ā this is normal and your score typically climbs back soon.
3. Closing a Loan Improves Credit Utilisation
Personal loans are unsecured credit. Clearing them:
Reduces your total liabilities
Shows lower dependence on credit
Improves overall credit health
This contributes positively to your score in the long run.
4. A āClosedā Status Helps Future Loan Approvals
After closure, the loan account in your credit report changes to:
āClosedā or āLoan Closed ā Paid in Full.ā
This is a very positive sign for lenders because it shows:
No outstanding dues
No settlement or write-off
Successful loan completion
This helps greatly when applying for future credit cards, personal loans, or home loans.
ā 5. Settled or Partially Closed Loans Harm Your Score
Not all loan closures are good.
If the closure is marked as:
āSettledā
āWritten-offā
āPartially paidā
Your credit score will drop sharply.
Lenders treat settlements as red flags because they indicate financial stress.
ā 6. Failure to Update Closure Can Hurt Your Score
If the lender does not update the loan closure in your credit report:
Your account may still appear āactiveā
EMI delays may get reported incorrectly
Always check your credit report after 30ā45 days of closing a loan to ensure it shows āClosed.ā
Summary: Does Loan Closure Increase or Decrease Credit Score?
| Type of Closure | Impact on Credit Score |
|---|---|
| Normal closure with timely EMIs | Strong positive impact |
| Pre-closure | Small temporary dip, then positive |
| Settlement / Write-off | Major negative impact |
| Incorrect reporting | Negative until corrected |
FAQs
1. Does closing a personal loan improve credit score?
Yes, if closed normally with full repayment.
2. Will pre-closing a loan reduce my score?
Yes, it may cause a small temporary dip, but improves long-term credit health.
3. How long does it take for credit score to update after closure?
Usually 30ā45 days after the lender reports it to credit bureaus.
4. Why does settlement lower my credit score?
Because it signals inability to repay the full loan amount.
5. Should I close my loan early?
If your goal is to save on interest, yes. If your goal is to maintain credit mix, continuing the loan is fine.
Published on : 25th November
Published by : SMITA
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