If I take the personal loan, start making payments regularly and then decide to completely repay it - what will happen to my credit rating? Would it improve, decrease or not be affected?
It won't matter, the credit agencies will see that the loan has been repaid and it doesn't matter if it's earlier than when it is supposed to be paid off.
You will have to talk to your bank on whether or not there is an early payoff fee. Because you're paying the loan off early, the bank is going to miss out on the interest they would have otherwise been able to collect.
The credit rating is the output from a behavior model that indicates the likelihood that a bank will earn money if they give you a loan. Early repayment of a loan will affect your credit rating, but the net impact depends on the other factors that go into the particular model. Even though the bank made less money, the overall risk of your portfolio is reduced, and you have more disposable income. I would expect the impact to be nearly neutral for a single loan, but the algorithms are proprietary.
There can be a slight indirect effect, but it should not keep you from paying off a loan, as the interest you save is for sure more valuable.
For example, assume you have a 10k$ credit card, and a 20k$ car loan. Assume further the car loan is halfway paid off, and you carry 8k$ on your card. This totals to 18k$ of 30k$ 'credit total' used, or 60%.
By paying off the car loan fully, you end up with 8k$ of 10k$ or 80%, which is worse and your score goes a bit down.
Similar logic applies if the age of the car credit is significant compared to the credit card, as paying it off removes it from the calculation and reduces the average age.
Both cases are rare, and the effect is often the other way - positive for you.
protected by Chris W. Rea Aug 28 at 11:50
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