Clearing off or paying off your loan completely is not the same as paying your EMIs or credit card bills. Completely prepaying your loan indicates a closed account. But only open accounts are taken into account while calculating the credit score. Effective management of the finances of the open accounts makes a difference in the impact on credit scores than the ones closed early. This is because open accounts are the ones that indicate your past and present debt history. This logic does not hold good for credit card repayments. Even if you pay off the balance, the credit card account stays open. A credit card with a zero balance or a very low balance and a high credit limit is good for your credit score. This leads to a high credit utilization ratio.
What Are The Things To Consider Before You Prepay?
Debt-to-income ratio
Prepaying your loan will reduce your debt-to-income ratio. This is beneficial if you are planning to take another loan after repaying the current one. If your DTI is lower, your chances of loan approval are higher.
Savings
Although repaying your loan early can relieve you of the loan burden, exhausting your savings to do this is not a good idea. Savings come in handy when you meet with unforeseen financial circumstances. But, if you have abundant savings, you can prepay the loan. However, if your savings are less, it is not advisable to prepay your loan.