Personal Loans

What to Expect When You Pay Off Your Personal Loan

What happens when you pay off your personal loan? Learn what happens when you pay off your loan and if it's worth paying it off early.
A happy woman is looking at a letter she received in the mail letting her know that her personal loan has been paid off
Written by:
Kenya McCullum
Edited by:
Kristin Marino verified

Maybe you’re thinking about taking out a personal loan. Maybe you’ve put in applications with a few lenders. Maybe you already have a personal loan you’ve been making payments on for a while.

No matter what the case, you may be wondering what happens when you get to the finish line and your loan has been paid in full. If you’re interested in finding out what to expect when you reach this milestone, continue reading for details of what happens when you pay off a personal loan.

You Will Receive Confirmation From Your Lender

When you pay off your personal loan, you will receive a letter from your lender within 10 days of making the last payment confirming you have paid your balance in full.

This letter serves as proof that the account is closed and you don’t have outstanding debts with the lender, which can make it easier if you want to apply for another loan or credit card later.

However, you don’t have to wait until you’ve paid off the loan to receive a payoff letter.

Consumers may ask for a payoff letter at any time during the duration of their loan to get a roadmap of what they need to do to clear their balance.

This letter will tell you how much you owe at the time you request the letter, as well as instructions on what to do if you want to pay the loan off in the immediate future.

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Your Lender Will Report Your Loan as Paid Off to the Credit Reporting Agencies

After you’ve made your last personal loan payment, your lender will inform one or all of the three credit reporting agencies — Equifax, Experian, and TransUnion — that you’ve paid in full and your account has been closed.

It can take about 30 to 60 days for a lender to send this information to credit bureaus, so don’t expect it to be reflected on your credit report for a while.

If it has been longer than a few months and your account is not being listed as closed on any of your credit reports, be sure to contact the relevant credit reporting agency to have the information updated.

Your Credit Score May Go Down a Few Points

Some people take out personal loans to boost their credit score, so it may seem counterintuitive that after you’re done with your payments, your credit score may actually go down.

This happens because a large part of how a credit score is calculated is based on credit utilization, which is the percentage of credit you’re using of the amount you have available.

When you pay off your personal loan and the account is closed, it means you have less available credit, so if you still have open accounts, your credit utilization may go up instead of down.

In order to solve this problem, continue paying your credit cards and loans so your credit score begins to rise.

Your Debt-to-Income Ratio Will Improve

While your credit utilization rate may increase after you’ve paid off your personal loan, your debt-to-income ratio will decrease.

This ratio describes the percentage of debt you have compared to your monthly income, so when you pay off your loan, that percentage will go down and this part of your credit score will improve.

You Will Have Extra Money in Your Budget Every Month

Paying off your personal loan can be a welcome relief to your wallet, which allows you to use that money for other things — from putting it away for a rainy day to funding a vacation to increasing payments on other debts.

In addition, freeing up that money in your budget can go a long way toward giving you peace of mind because you have one less financial commitment to worry about, and more wiggle room to deal with unexpected expenses.

Should You Pay Off Your Loan Early?

Paying off your personal loan early sounds like a great idea, but it may not be the right choice for everyone.

Here are some pros and cons for you to keep in mind if you’re considering clearing this debt sooner rather than later.

Pros of Paying Off Your Personal Loan Early

There are several benefits you can enjoy if you pay off a personal loan early. The following are some of the pros you can expect to experience when you do.

Saving money on interest

Even a low interest rate can add up over time, so when you pay off your personal loan early, you get the opportunity to save money on the interest accruing during the duration of the loan.

Depending on how much money you borrowed, this can amount to tens of thousands of dollars saved when you’ve taken the initiative to pay off the loan early.

Increasing your monthly budget

Not having a loan payment every month can boost your monthly budget so you can spend money on other things.

These extra funds can help you pay off other debts early, as well as comfortably put away money for emergency and retirement funds, or do something fun you hadn’t been able to afford.

Also, this money can be used on necessities you may have delayed, like a new car or improvements to your home.

Having more peace of mind

Having any debt hanging over your head can be extremely stressful, so as you watch the amount you owe decrease, you can increasingly experience peace of mind.

Paying off your personal loan early can take a huge load off your shoulders because you know you’ve been able to hop over one financial hurdle — an indicator that you can do the same thing again in the future with any other debts you have.

Cons of Paying Off Your Personal Loan Early

You may be surprised to learn that paying off a personal loan early is not an entirely rosy picture.

There are certain drawbacks to getting rid of this debt, and the following are some for you to consider.

Paying penalties

Before paying off your loan early, review your contract to find out if the lender will assess a prepayment penalty.

In some cases, banks will charge fees in order to recoup some of the interest revenue they’ll lose from the borrower’s contract ending earlier than expected.

This penalty is generally based on a percentage of your balance at the time you pay off the loan, so figure out how much the penalty will end up being and whether or not it’s more than the interest you’d otherwise pay. If it is, paying off the loan early may not be the best decision for you.

Inhibiting the ability to build credit

While the desire to pay off a debt early can make sense, if you’re trying to build or improve your credit, paying your personal loan off too soon may hurt your cause.

As a result, you may want to delay closing an account while you increase your credit score to where you want it to be.

Having less cash on hand

Paying off a personal loan can help you financially in the long term, however, in the short term, you may find yourself a little bit squeezed because you have less money on hand.

That’s why it’s a good idea to crunch the numbers and make sure taking this step makes sense right now.

Depending on how much it is, you may want to pay off your loan at a slower pace instead of tackling the entire balance at once.

This can ensure that you easily keep up with your monthly expenses and have money on hand in case of an emergency.


Is paying off a personal loan early worth it?

It depends on your situation.

Sometimes paying off a loan early will go a long way toward helping you have more money on hand and reaching your financial goals.

However, in other cases, it’s not the best choice. If you’re going to be charged an exorbitant fee by your lender for closing the account early, it may not be worth it to pay off a personal loan early.

Does your credit score go up when you pay off a loan?

Your credit score can go up after paying off a loan, however, you may not see the results immediately.

It can take a few months for credit bureaus to get the information from your lender that your account has been paid off, so your credit score won’t change right away.

If you’ve been paying the loan off for a while, and you’ve always made payments in full and on time, you’ve established a long track record that will probably help to improve your credit score.

On the other hand, when you pay off a loan, if you have other outstanding debts, your credit score may actually take a dip.

When closing an account, it means that you have less available credit, so your credit utilization may actually get higher, which results in your credit score getting a little bit lower.

When should you not use a personal loan?

A personal loan can be used for a variety of expenses, from home improvement projects to an emergency situation.

However, they are not always the best option.

For example, using a personal loan for college tuition isn’t a good idea because you can get better rates by taking out a loan from the federal government.

Also, before taking the step of getting a personal loan for tuition, be sure that you’ve exhausted all of your options in terms of scholarships and grants you can use to defray the cost of tuition.

Other examples of when you shouldn’t get a personal loan are when you need to put a down payment on a house or you’re starting a business. In fact, mortgage lenders generally won’t allow consumers to use a personal loan for a home down payment. When it comes to starting a business, you ideally want to build up your business credit, so a personal loan will not help to accomplish this.

What are the risks of a personal loan?

Before taking out a personal loan, it’s important to consider the risks.

Some of the things that may make a personal loan less attractive include high interest rates, prepayment penalties, increased debt, and potential damage to your credit score.

What personal loans should I avoid?

While generally personal loans can help you reach your financial goals, there are some types that are too risky and should be avoided. For example, payday, 401(k), and title loans come with extremely high interest rates and aggressive payment schedules that people may not be able to realistically keep up with.

Bottom Line

Paying off a personal loan is a huge accomplishment to be proud of.

Whether you decide to pay it off early, or stay the course over a longer period of time, understanding what you can expect when you’re done is important.

Either way, pat yourself on the back for taking control of your debt and doing something positive toward a brighter financial future.