Paying off a personal loan early may seem like a smart financial move, but the reality is more nuanced. For many Australians, the decision goes beyond saving on interest, and affects credit reporting, future borrowing power and overall financial flexibility. This is why questions like “Should I pay my personal loan off early?”, or “Does paying off a personal loan early hurt credit?” come up so often.
This guide breaks down the real pros and cons of paying a personal loan off early, so you can decide whether it makes financial sense in your situation.
Key takeaways:
- Paying off a personal loan early can save interest, but the best move depends on your payout figure, any break costs and whether you can keep a solid cash buffer.
- Paying a personal loan off early doesn’t hurt your credit score, although a small short-term shift can occur when the account closes.
- Under comprehensive credit reporting, repayment history matters most, so consistent on-time repayments support your credit profile while the loan is active.
- Fixed-rate loans are more likely to carry early repayment adjustments, so getting a formal payout quote is essential before making lump-sum payments.
- If you consolidated debt, paying the loan out early only helps if you avoid rebuilding balances on credit cards afterwards.
How do personal loans affect your credit score in Australia?
Personal loans influence your credit score through Australia’s comprehensive credit reporting system. This system, regulated under the Privacy Act and overseen by the Office of the Australian Information Commissioner, allows lenders to report both positive and negative credit information.
When you take out a personal loan, credit reporting bodies such as Equifax or Experian record the application, loan amount, repayment history and whether the account is open or closed. According to Equifax Australia, repayment history is one of the most influential factors in modern credit scoring models, often outweighing the simple presence of debt itself. This means a well-managed personal loan can support a healthy credit profile, particularly for borrowers who already demonstrate stable income and responsible borrowing behaviour.
Does paying off a personal loan early hurt credit?
For most borrowers, paying off a personal loan early does not harm their credit score in any meaningful or lasting way. There is no negative mark applied simply because a loan is repaid ahead of schedule. The account is typically reported as closed and paid, which is viewed as a positive outcome.
That said, some people notice a small, temporary change in their score after closing a loan. This usually happens because the account is no longer active, which slightly alters the overall credit mix on file. If the personal loan was your only instalment debt, your profile may appear thinner for a short period. This is a normal adjustment rather than a penalty.
It is also important to separate credit score mechanics from lender assessments. While a credit score may shift marginally, many lenders place strong emphasis on reduced debt obligations when assessing affordability. From a lending perspective, having fewer ongoing commitments can improve borrowing capacity, even if the credit score itself remains largely unchanged.
What are the real benefits of paying a personal loan off early?
- Interest savings — This is perhaps the most tangible advantage. Because interest is calculated on the remaining balance, paying down the loan sooner can significantly reduce the total amount paid over the life of the loan, especially in the earlier years of a longer term.
- Cash flow benefit — Removing a fixed monthly repayment can free up income for other priorities, such as building savings or investing. For some borrowers, the reduced financial pressure provides peace of mind and greater flexibility when circumstances change.
- Improved borrowing capacity — Clearing a personal loan can improve your debt-to-income position, which many lenders use when assessing affordability for future credit, including mortgages. Even when your credit score stays steady, having fewer monthly commitments can make you look like a lower-risk applicant.
What are the biggest cons and trade-offs of paying a personal loan off early?
- Liquidity — If you pour spare cash into your loan and then face an unexpected expense, you may end up relying on higher-cost credit to bridge the gap. For most households, a stable emergency buffer is a more practical safety net than a slightly lower interest bill.
- The risk of paying to exit — Some loans, particularly fixed-rate loans, can trigger an early repayment adjustment that reduces the benefit of paying ahead. AFCA notes that lenders may refer to these charges as break fees, early exit fees or economic costs and they generally relate to changes in interest rates over the fixed period.
- The risk of debt cycling — A personal loan is often used for debt consolidation to replace revolving debt. If the loan is paid out early but, say, credit card balances climb again, your net position is worse even if the loan is gone. In practice, the best move is to keep total debt moving down, not just clearing one account quickly.
- Credit profile changes — As mentioned, closing a loan can slightly change your credit mix and the number of active accounts on file. It’s usually minor and short-term, but it can feel counterintuitive if you’re monitoring your score closely before a major application.
Understanding the early repayment fee
With fixed-rate lending, early repayment costs are a known feature across the market. ASIC explains that a fixed rate is a price you and the lender lock in for a set period. If you exit early and current rates are lower than your fixed rate, the lender can charge a break cost to cover the difference. If current rates are higher, the break cost may be smaller, and in some cases it may be nil, depending on the lender’s formula and your contract.
However, there’s really no need to guess. Many lenders provide a quote process and examples of how the early repayment cost is calculated for fixed-rate personal loans. ANZ, for instance, publishes a short guide on repayments and directs borrowers to obtain a quote before making significant additional repayments.
If you’re unsure what applies to you, the safest approach is to request a formal payout figure and ask whether it includes any early repayment adjustment and how long that figure is valid for.
How do you decide if you should pay your personal loan off early?
If you want a decision that holds up financially, treat it like a comparison between two costs and one risk.
- Start with the facts — Ask your lender for a payout figure and confirm whether any early repayment cost applies, particularly if your loan is fixed. Then, compare the remaining interest you would have paid against any fee or adjustment. If the difference is meaningful and you can still keep a healthy cash buffer, early payout is a strong option.
- Consider the timing — Paying off a personal loan early doesn’t “hurt” credit, but changing your active accounts can shift your score a little in the short term. If you’re close to applying for a mortgage, some borrowers prefer stability and may choose to delay closing an account until after approval.
- Sanity-check your budget — The best early repayment plan is one you can maintain without financial strain. Equifax notes that repayment history can be shown on a month-by-month basis for up to 24 months, so consistency matters.
How to pay a personal loan off early without getting stung
If you’re now set on paying a personal loan off early, your approach should fit the loan terms and your cash flow. Here are your options:
- Increase your regular repayment amount so the loan amortises faster.
- Make occasional extra repayments when surplus cash is available, such as after a bonus or tax return.
- Consider a full payout if the interest savings clearly exceed any costs, and you are not draining funds you may need.
The detail that trips people up is how additional money is applied. Some lenders automatically treat extra repayments as bringing forward your next due date, rather than reducing the total interest over the term. If your aim is interest savings, ask the lender how extra payments are allocated and whether you can keep repayments on schedule while reducing principal faster.
If you’re considering refinancing as a strategy, assess it with the same discipline. The rate may be lower, but fees and credit enquiries can reduce the advantage. The best refinance is one that reduces your total cost and improves your cash flow without adding unnecessary complexity.
So, should you pay a personal loan off early?
Paying a personal loan off early can be beneficial, but as we covered in this guide, it’s not automatically the best move. The decision comes down to three practical questions:
- How much interest do you save?
- Does any early repayment adjustment apply, and if so, does it significantly cancel the savings benefit?
- Do you still have enough cash available after paying extra?
Moreover, credit score impact is usually secondary, as your repayment history still reflects how you managed the loan while it was active. The bigger risk is financial strain from losing liquidity, or paying a break cost that wipes out the savings.If you want a clearer view of what your options could look like, Now Finance offers personal loans designed to keep costs transparent and manageable. We’re proud to offer a structure where the comparison rate matches the interest rate, so it’s easier to understand the true cost of borrowing from the outset. Reach out to us for more information or get your personalised rate today.
