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When you repay a loan early ( partially or in full), you reduce your total outstanding debt. This immediately improves your credit utilisation ratio.
The industry is evolving, introducing innovative products that let you start building a credit score without needing a payslip or prior credit history.
Authored by Manish Shara, Co-founder and CEO, ZET: For many borrowers, prepaying a loan feels like crossing the finish line early. Fewer EMIs, less interest, and quicker financial freedom. But one common question often lingers: Does prepaying a loan help or hurt your credit score?
The short answer: It mostly helps. However, there are nuances worth understanding.
What Shapes Your Credit Score?
In India, credit scores are issued by four RBI-licensed credit bureaus: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. These agencies assign scores typically ranging from 300 to 900. A score above 750 is generally considered healthy and significantly improves your chances of loan and credit card approvals, and better credit terms.
Credit scores are calculated based on multiple factors, including:
Repayment history (35-40% weightage)
Credit utilisation (20-25%)
Credit mix and duration (20-25%)
New credit enquiries (10%)
Other factors such as account age and total debt
When you prepay a loan, it can influence several of these components, especially your credit utilisation, account age, and credit mix.
How Prepayment Helps Your Score
Lower Debt Means Lower Risk
When you repay a loan early ( partially or in full), you reduce your total outstanding debt. This immediately improves your credit utilisation ratio, which is the share of credit you’re using relative to what’s available to you. A lower ratio signals lower credit risk and can positively impact your score over time.
Strengthens Your Repayment Track Record
If you’ve consistently paid your EMIs on time before prepaying the loan, the credit bureaus will record a clean repayment history followed by a “closed” loan account. That’s a win-win.
However, if your repayment history has been patchy, prepaying won’t erase earlier delinquencies. Credit bureaus typically retain historical data for up to seven years. But closing the loan systematically can still signal an effort to improve credit behaviour.
A ‘Closed’ Loan Is Not a Bad Thing
When you fully repay a loan, the lender marks the account as closed on your credit report. This is very different from a settled status, which implies the loan wasn’t paid in full and harms your score.
A “closed” account shows you’ve fulfilled your obligations. But there’s a small caveat: if the repaid loan was your only active credit product, your score might dip temporarily due to reduced credit diversity or average account age. That said, this is typically a minor and short-term effect.
Watch Out for These Pitfalls
Prepaying Too Soon With a Thin Credit Profile
If you’re a new borrower with limited credit history, closing your only loan early might shrink your credit footprint. That could affect your score if you plan to apply for another credit product shortly afterward. Maintaining an active, healthy credit account is crucial for building a robust credit profile.
Prepayment Charges May Apply
While the Reserve Bank of India prohibits banks from levying prepayment penalties on floating-rate personal loans offered to individuals, this does not apply to all types of loans. Fixed-rate loans and loans to non-individual borrowers may still carry prepayment fees. Always read your loan agreement carefully.
Better Use of Surplus Funds
If you’re servicing a low-interest loan, prepaying may not be the most efficient use of your money. Consider your broader financial picture, could that cash earn better returns elsewhere, like in a high-yield FD, mutual fund, or emergency corpus?
Will Prepayment Instantly Boost My Credit Score?
Not quite. Credit scores don’t jump overnight. Credit bureaus receive data from lenders monthly, so any positive impact from a prepayment can take 30 to 60 days to reflect. Moreover, your score is influenced by your overall credit behaviour, not just one account. Patience and consistency remain key.
Best Practices After Prepayment
Ask for an NOC (No Objection Certificate) from your lender once your loan is fully repaid.
Check your credit report after 30–60 days to confirm the loan has been marked “closed” and the outstanding balance is updated to zero.
Dispute errors immediately if the closure is not correctly reflected, to prevent negative scoring.
Final Word
Prepaying a loan is typically a sound financial move. It lowers your debt, reflects responsibility, and strengthens your credit profile in the long run. While it may not deliver an instant credit boost, it reinforces two of the most critical pillars of credit health, low utilisation and strong repayment history.
India’s credit ecosystem is becoming more borrower-friendly, and proactive steps like prepayment are increasingly being recognised and rewarded. Whether you’re choosing to close a loan early or continue with scheduled EMIs, understanding how it affects your credit score puts you in better control of your financial journey.
It is authored by Manish Shara, Co-founder and CEO, ZET
The views expressed in this article are those of the author and do not represent the stand of this publication.
Varun Yadav is a Sub Editor at News18 Business Digital. He writes articles on markets, personal finance, technology, and more. He completed his post-graduation diploma in English Journalism from the Indian Inst…Read More
Varun Yadav is a Sub Editor at News18 Business Digital. He writes articles on markets, personal finance, technology, and more. He completed his post-graduation diploma in English Journalism from the Indian Inst… Read More
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