Does cancelling a loan application impact your credit score?

No, cancelling a loan application before the amount is disbursed will not have any impact on your credit score. Keep reading.

Will cancellation of a loan application hurt your credit score?

No, cancelling a loan does not impact your credit score. The reason for this is simple – when you cancel a loan application, there is nothing that your lender has to report to the credit bureau. 

What is a credit score?

Your credit score is a snapshot of your credit history. It reflects how likely you are to repay the debts you have taken on. Different credit bureaus use a different formula to calculate the exact number, but the factors involved tend to stay the same across bureaus.

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Loan application impacts your credit score

Whenever you apply for a loan, the lender will make an inquiry with a credit bureau of its choice. CIBIL is the most popular credit bureau in India. This is called a “hard” inquiry and is noted in your credit history. Typically, 8% to 10% of your credit score is based on the number of credit-based applications you make. This will include loan applications, credit card applications, applying for a credit line like PayLater services etc. 

When a hard inquiry is placed on your credit report, it makes a small dent in your score. But the impact is very low, and typically erased within months – if you are paying back all your debts on time. A high number of inquiries in short time may indicate you are desperate for a loan, or, you are taking on more debt than you can handle. 

This does not mean you should not shop around when looking for a loan. Depending on the loan type, the credit bureau may consider multiple inquiries in a short period as originating from a single request. This applies to education loan and car loan, for example. 

Therefore, your credit score takes a hit whenever you apply for a loan.

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What happens if you cancel the loan? 

To cancel your loan application, you should reach out to your relationship manager and inform her/him that you do not wish to take on the loan anymore. If you cancel the loan application before a credit inquiry is even made, your credit score will not be impacted in any way.

If you cancel the loan application after it has been sanctioned, your credit score has already been impacted, and cancelling it will have no further impact on it. You cannot cancel the loan application after the loan has been disbursed. 

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Pre-closure of loan account

There is a misconception that pre-closing a loan hurts the credit score. This is incorrect. This impacts your credit score positively. The reasons for this are two-fold: (1) your credit utilisation goes down as you now have higher available credit, and (2) your debt-to-income ratio improves drastically. 

The credit score would improve further if the loan that you have closed was an unsecured loan. This is because most credit bureaus have different weights for secured and unsecured loans. As unsecured loans are considered riskier, they have a greater impact on your credit score. 

Pre-closure of a loan shows the lenders and credit bureau that you are reliable. It is proof that you can repay the loans you have taken, and are willing to repay it at the earliest possible. 

If you get some unexpected income – in the form a bonus or gift, you should try to repay as much of your loan as possible. You can choose to make a partial repayment on loan as well. This will save you on future interest payments – as your EMIs will be recalculated for the smaller amount. Typically, the tenure of the loan stays the same. As this will improve your debt-to-income ratio, it will improve your credit score.

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Impact on future credit

Cancelling your loan has no impact on your future credit, as long as you do not do it frequently. As noted before, the effect of hard inquiry made by the lender is very minimal and does not last for very long. On the other hand, if you pre-close your loan account, the positive impact will stay on your credit history for long. This will be seen as good credit behaviour by lenders and will increase the chances of getting a loan in the future. Read this piece to know how does your employer profile decide your loan eligibility?

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