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There are only a few more payments left on your loan, and you’re ready to celebrate. But before you close out the account, you need to know what comes next.
Paying off a personal loan isn’t simply about clicking “submit payment” one last time. It affects your credit profile, your monthly budget, and even your long-term financial plans. If you walk into the final payoff with no strategy, you could leave potential benefits on the table.
Here's what happens when you pay off a personal loan, how it impacts your credit score, and how to make smart moves with the cash it frees up.
3 things to consider before paying off a personal loan
Paying off your loan is a win, but the transition period can come with shifts you’ll want to be ready for.
1. Your credit score might take a hit — but don’t panic
Paying off a personal loan doesn’t impact everyone’s credit score the same way. Some people see a small drop, some see no change, and others see a slight bump.
Your score is most likely to drop if the personal loan is your only installment loan. Credit scoring models prefer a mix of credit types — both revolving credit (such as credit cards) and installment credit (like personal or auto loans). If you pay off your only loan, you’ll lose that balance in your credit mix.
“Because you’re closing an active account, it slightly shifts things like your credit mix, credit age, and ongoing positive payment activity,” said Melissa Cox, a certified financial planner (CFP) at Future-Focused Wealth in Dallas. “That can cause the algorithm to move a few points.”
Borrowers with low installment loan balances tend to be less risky than borrowers with no active installment loans at all, according to FICO, the credit data analytics company. Because of that, paying off your final installment loan can cause a small dip in your score.
But for most people, this dip is tiny and temporary. Think somewhere in the range of about 5 to 10 points if you already have decent credit, said Cox.
Remember, paying off a personal loan ultimately helps your credit score — assuming you’ve made (and continue making) on-time payments.
“You’ve lowered your debt, freed up cash flow, and showed you can manage credit responsibly,” said Cox. “That’s a long-term win, even if the score takes a moment to catch up.”
Those positive on-time payments can also stay on your report for up to 10 years, while any late payments or delinquencies generally fall off after about seven years. If your score does dip, you can expect to see it rebound about 30 to 45 days after paying off your loan, according to Equifax, one of the three nationwide consumer reporting agencies.
The key move here is to expect the drop so it doesn’t catch you off guard. “Don’t let a small dip distract you from a big milestone,” said Cox.
Learn more: Here’s how to check your credit score for free
2. Your debt-to-income ratio will go down
Your debt-to-income ratio (DTI) compares your monthly income to your monthly debt payments. Lower is always better.
Lenders check this ratio when deciding whether to lend you money. When you pay off a personal loan, your DTI improves immediately. That’s helpful if you’re planning to:
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Apply for a mortgage
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Take out a car loan
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Refinance existing debt for a better rate
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Qualify for certain rental applications
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Apply for a credit card
Even if you don’t intend to take on new debt right now, having a lower DTI gives you more options and flexibility. It means your paycheck isn’t getting demolished by debt payments, and you have greater bandwidth to handle surprises or opportunities.
A low DTI also helps you look better to lenders. As a result, you may start receiving lower-rate offers for credit cards, personal loans, and even refinancing options.
“Used wisely, that stronger credit profile can open the door to better financial options,” said Cox.
But think carefully before signing up. “Just because it’s offered doesn’t mean it’s a good fit,” said Cox. “Especially after doing the hard work to pay something off, the last thing you want is to slide right back into debt.”
3. Keep records and check your credit report
After that final payment posts, your lender should send confirmation that your loan balance is officially paid.
Keep this document in a safe place (a physical and digital copy is best). If there’s ever a reporting error on your credit report or a system glitch, this is your proof.
You should also:
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Check your credit report about 30 to 60 days after payoff to make sure the account is marked as “closed.” If you never missed a payment, the account might be labeled as “paid in full.” If you had late payments or refinanced the loan, it might say something else, such as “paid; past due 30 days.”
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Watch for any accidental autopay withdrawals on the next billing cycle.
These steps may seem tedious, but ultimately, they’re a way to protect yourself in case of a discrepancy between your credit report and your lender’s records.
Make a plan for the extra room in your budget
After that monthly personal loan payment disappears, you’ll have more financial breathing room. But without a clear plan in place, it’s easy for that money to disappear on everyday spending. That’s why it’s crucial to decide what to do with those funds before your final payment clears.
Some recommended ways to put that money to work include:
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Increase your retirement contributions through a 401(k) or IRA.
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Redirect the payment to another debt and help speed up your payoff (and save yourself money on interest).
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Build up your emergency fund, especially if you have less than three to six months' worth of expenses saved.
Setting up automatic transfers is a great way to ensure the money goes where you want, said Scott Oeth, a CFP and principal at Cahill Financial Advisors in Minneapolis.
“Put a good plan on autopilot,” he suggested. This set-it-and-forget-it strategy can help protect yourself from your future self.
“The automation means you only have to make the decision once, rather than relying on your future self to avoid temptation,” said Oeth.
Your budget already survived without that money — keep the habit working for your other financial goals.
What to do before paying off a loan early
If you’re considering paying off a loan early, there are a few additional things to keep in mind.
First, check for prepayment penalties. Some lenders charge these fees to make up for the interest payments you dodged by paying your loan off early. Thankfully, not many lenders charge this fee, said Kevin Feig, CFP and founder of Walk You To Wealth.
“Prepayment penalties aren’t common for personal loans, and it typically makes sense to pay off a personal loan as soon as possible,” said Feig.
Details on prepayment penalties (if applicable) will be outlined in your personal loan agreement. If you can’t locate your agreement — or make sense of what it says — call your lender and ask directly.
If your lender doesn’t charge a penalty and you have a healthy emergency fund in place, knocking out a personal loan early can be a smart decision. You’ll save money on interest, plus get that extra wiggle room back in your monthly budget sooner.
But if zeroing out the loan would strain your savings, slow down. Being debt-free isn’t helpful if one unexpected expense could wipe you out and put you right back where you started.
This article was edited by Alicia Hahn.
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