Question about paying off a personal loan early

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pac4toon
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Question about paying off a personal loan early

Postby pac4toon » Wed Feb 03, 2016 4:16 pm

I have this personal loan that I've been paying off for almost 2 years now. The payment booklet shows that my last payment will be in August of 2017. I've been paying this loan oon time every month. My question is, should I pay off the loan early (like when I receive my tax return) or should I just continue paying it monthly?

I've heard some say "Paying off an installment loan early will most likely not hurt your score, but leaving it open and managing it through the term of the loan shows that you can manage and maintain the account responsibly over a period of time — which is very good for your credit score." AND "But if you’re thinking of paying a loan off early solely for the purpose of boosting your credit score — don’t."


What say you?

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Vattené
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Re: Question about paying off a personal loan early

Postby Vattené » Wed Feb 03, 2016 5:49 pm

That is my understanding as well. Paying it off early isn't rewarded in most credit scoring models (in fact if it is your only installment loan it may even hurt you a little as the diversity of your credit is reduced). Pay it off early to save yourself interest if you wish, but don't expect it to help your credit.
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thom02099
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Re: Question about paying off a personal loan early

Postby thom02099 » Wed Feb 03, 2016 6:35 pm

pac4toon wrote:I have this personal loan that I've been paying off for almost 2 years now. The payment booklet shows that my last payment will be in August of 2017. I've been paying this loan oon time every month. My question is, should I pay off the loan early (like when I receive my tax return) or should I just continue paying it monthly?

I've heard some say "Paying off an installment loan early will most likely not hurt your score, but leaving it open and managing it through the term of the loan shows that you can manage and maintain the account responsibly over a period of time — which is very good for your credit score." AND "But if you’re thinking of paying a loan off early solely for the purpose of boosting your credit score — don’t."


What say you?

Thank you!


There's no single answer to this question. There are other factors at play, as Vattene indicated. It depends on whether you have other installment loans, and what type of loans they are. Do you have a mortgage as well? What about credit cards? A good mix of credit TL are frequently cited as necessary for the optimal scores. It also depends on your overall file, how thin/thick it may be. And even if there is a reduction in scores for paying it off, scores only matter if you're applying for new credit and need them to be optimal. Otherwise, they are simply for bragging rights.

I just paid off an auto loan and a personal loan will be paid off soon as well. It will be interesting to see what sort of hit, if any, I'll get upon the update of no auto loan. However, I have a very good mix of credit types, other installment loans and a very thick file, so there should be minimal impact, plus or minus.

ETA: There's also the personal satisfaction of not having a loan payment to make. Putting those funds to other use, whatever it may be, can be very rewarding in it's own right. If there's other debt that you need to tackle, taking the amount you would normally pay toward that installment loan, to reducing the other debt, can also be satisfying. If there's no other debt, then so much the better! Money to invest or save.
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kdm31091
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Re: Question about paying off a personal loan early

Postby kdm31091 » Wed Feb 03, 2016 9:24 pm

You have to decide what's more important to you: more points on your score, or the satisfaction and savings of not making those payments.

To me, although it goes against traditional advice, I think if you have the money, pay off the darn loan. There is no reason to keep spending money you don't have to, month after month. Pay it off and be done.

Yes, your score may take a hit from no longer having that installment loan being paid every month, and if you have a big app planned you may want to wait to take that hit. But otherwise, I'd just take the hit and move on. It will recover, and you're free of the debt. I for one would never stay in debt to satisfy a scoring model. I'm not going to let a score run my life. But that's just my opinion on it.

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Re: Question about paying off a personal loan early

Postby ingramjuan » Wed Feb 03, 2016 11:04 pm

[quote="pac4toon"]My question is, should I pay off the loan early (like when I receive my tax return) or should I just continue paying it monthly?"But if you’re thinking of paying a loan off early solely for the purpose of boosting your credit score — don’t." [/i]

Nothing is guarantee tomorrow, I am a firm believer if you can pay a bill in full pay it, save the interest and invest it your score may take a small hit but that's nothing. However when I didn't have any credit and was in the building phase of my life, I kept a car loan an extra 1.5 years just to build a good payment history.
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pac4toon
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Re: Question about paying off a personal loan early

Postby pac4toon » Thu Feb 04, 2016 3:24 pm

Hey thank you for your input Vanette, Thom02099, KDM31091 and Ingramjuan.

I am planning to purchase a new car sometime this year. I'm just wondering how the income-to-debt ratio factors in with that personal loan.
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takeshi
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Re: Question about paying off a personal loan early

Postby takeshi » Fri Feb 05, 2016 1:05 pm

It has an impact but nowhere near as much as revolving utilization. Installments are generally viewed as not as risky as revolvers.

kdm31091 wrote:To me, although it goes against traditional advice, I think if you have the money, pay off the darn loan.

A lot of people seem to be obsessed with scores but I pay off installments when possible regardless of scoring impact.

For the OP: Credit Mix is typically ~10%.
http://www.myfico.com/crediteducation/w ... score.aspx

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CarefulBuilder14
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Re: Question about paying off a personal loan early

Postby CarefulBuilder14 » Mon Feb 08, 2016 9:38 am

I see so many people talk about how their FICOs fall as soon as an installment loan is paid off and the history is considered "old news". That's the case whether they pay it off early or according to the original payment schedule.

If you're halfway through a 36-month (approximately) personal loan, then interest is still alive and kicking. Also, personal loans often have APRs that are higher than mortgages and cars. That's a bit different than being in year 25 of a 30-year low fixed rate mortgage where they payments are mostly principal.

I don't have all your numbers in front of me, but it sounds like you should use cash to reduce the interest you pay as much as possible. I'm not sure if that's most effectively done by paying off the personal loan early or putting more money towards your upcoming car purchase. Either way, it sounds like you've got some bad debt to kill.
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pac4toon
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Re: Question about paying off a personal loan early

Postby pac4toon » Thu Feb 11, 2016 7:38 pm

@takeshi and @CarefulBuilder14 Thank you for your input. I will probably pay it off as soon as I receive my tax return. That would be one less thing on my list. I'll be debt free after that, or until I buy a new car or home.
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