Is paying off finance early a bad idea?
Discussion
Evening gents,
Looking to get on the property ladder next year, credit rating is good however I haven’t borrowed much. My first credit card is on its way. I’m trying to build my credit rating, only credit I have is my overdraft which I use once or twice a month and I pay it off immediately.
Looking to indulge myself in a product I’ve had my eye on and there is a finance option available.
Deposit is 1000, I will be borrowing 3100, the interest is 9.9%.
I want to pay it off within 12 months but they only have 36, 48 & 60 month deals.
If I was to go ahead with the 3 year deal and pay 250 a month intending to clear the finance in a year, will a mortgage company or any lender look at this negatively and reduce my chances of obtaining finance?
I rang the finance provider in question and the lady on the phone said she didn’t know if it would, would be better off to ask the mortgage company but I have no idea what one it will be at this point!
The finance sub forum can be treacherous sometimes and a lot of abuse is thrown at people who ask about borrowing money so please, don’t ask what t is, don’t tell me not to go for it, just to tell me if it’s a good or bad idea.
Thank you in advance and be nice
Looking to get on the property ladder next year, credit rating is good however I haven’t borrowed much. My first credit card is on its way. I’m trying to build my credit rating, only credit I have is my overdraft which I use once or twice a month and I pay it off immediately.
Looking to indulge myself in a product I’ve had my eye on and there is a finance option available.
Deposit is 1000, I will be borrowing 3100, the interest is 9.9%.
I want to pay it off within 12 months but they only have 36, 48 & 60 month deals.
If I was to go ahead with the 3 year deal and pay 250 a month intending to clear the finance in a year, will a mortgage company or any lender look at this negatively and reduce my chances of obtaining finance?
I rang the finance provider in question and the lady on the phone said she didn’t know if it would, would be better off to ask the mortgage company but I have no idea what one it will be at this point!
The finance sub forum can be treacherous sometimes and a lot of abuse is thrown at people who ask about borrowing money so please, don’t ask what t is, don’t tell me not to go for it, just to tell me if it’s a good or bad idea.
Thank you in advance and be nice
No, there is no negative implication for your credit score if you pay off early; only if you don't pay!
One thing to note, if you are paying £250pm to the loan, this will be taken off your income for the affordability assessment- the mortgage company will not discount it because you plan to pay it off early.
One thing to note, if you are paying £250pm to the loan, this will be taken off your income for the affordability assessment- the mortgage company will not discount it because you plan to pay it off early.
9.9% sounds a bit high for interest...why not borrow the money at a sensible rate elsewhere over 12 months?
I've heard people say that paying something off early "damaged their credit score" it's nonsense.
That said, why spend nearly 3k on an indulgence when you could add it to your deposit or use it on some of the house buying expenses that are coming your way?
I've heard people say that paying something off early "damaged their credit score" it's nonsense.
That said, why spend nearly 3k on an indulgence when you could add it to your deposit or use it on some of the house buying expenses that are coming your way?
Piginapoke said:
No, there is no negative implication for your credit score if you pay off early; only if you don't pay!
Whilst there is no specific negative implication for your credit file in paying credit off early, the OP wants to build his credit history and you can only build history by taking out, maintaining and paying back credit..........the more history you have, the more confidence other lenders will have to lend to you..........Piginapoke said:
No, there is no negative implication for your credit score if you pay off early; only if you don't pay!
One thing to note, if you are paying £250pm to the loan, this will be taken off your income for the affordability assessment- the mortgage company will not discount it because you plan to pay it off early.
Yes of course I plan to definitely pay this loan off before I apply or put any offers on, I’ll pay whatever I can each month to get rid of the debt as soon as I can!One thing to note, if you are paying £250pm to the loan, this will be taken off your income for the affordability assessment- the mortgage company will not discount it because you plan to pay it off early.
Macneil said:
9.9% sounds a bit high for interest...why not borrow the money at a sensible rate elsewhere over 12 months?
I've heard people say that paying something off early "damaged their credit score" it's nonsense.
That said, why spend nearly 3k on an indulgence when you could add it to your deposit or use it on some of the house buying expenses that are coming your way?
I haven’t asked my bank yet as I think 150 over the year is perfectly reasonable to borrow that money and the staff member in question is very nice so would like to see her benefit from the commission.I've heard people say that paying something off early "damaged their credit score" it's nonsense.
That said, why spend nearly 3k on an indulgence when you could add it to your deposit or use it on some of the house buying expenses that are coming your way?
You’re right about the money going towards house buying expenses however the projected amount of money I will have when that time comes should over the deposit and expenses. Naturally I’d put it towards the deposit but it will make zero difference to the mortgage. It will be a small one bed place anyway so probably a 2k IKEA job
DoubleD said:
If you are getting on the property ladder you must have a deposit for the purchase, so just buy what ever its is that you "need" with that.
I will have a deposit by then, I have money saved now and from now until spring/summer, I will have it. I could buy said item now outright if I want to but considering the low cost of interest over the year, I don’t see why I should buy it outright when I could just pay it off in a year while retaining that cash. I also intend to build my credit history so it sort of makes sense to finance it. The only issue is paying it off early, I remember a thread about this man called derek 911 having credit troubles and I recall somebody saying finance companies don’t like it when you pay things off early as they earn less money from interest so I just need to confirm this as a mortgage lender may see this and not like it. Having said that, I doubt first time buyers pay off chunks of their mortgage early while earning a modest wage.
Chestrockwell said:
DoubleD said:
If you are getting on the property ladder you must have a deposit for the purchase, so just buy what ever its is that you "need" with that.
I will have a deposit by then, I have money saved now and from now until spring/summer, I will have it. I could buy said item now outright if I want to but considering the low cost of interest over the year, I don’t see why I should buy it outright when I could just pay it off in a year while retaining that cash. I also intend to build my credit history so it sort of makes sense to finance it. The only issue is paying it off early, I remember a thread about this man called derek 911 having credit troubles and I recall somebody saying finance companies don’t like it when you pay things off early as they earn less money from interest so I just need to confirm this as a mortgage lender may see this and not like it. Having said that, I doubt first time buyers pay off chunks of their mortgage early while earning a modest wage.
Buy items that you need with your credit card and pay it off quickly.
You have the cash so don’t “need” to borrow (& would expect to be able to repay before house purchase if you did), you just want to do this to improve credit rating - so why borrow £3k costing you £150? (you could borrow a lesser sum for the credit history if it really mattered)
Is there something restricting you from accessing the savings you have like in a “help to buy” or “lifetime” ISA? (If you haven’t got one might be worth looking at as it’s free money towards your house next year)
Is there something restricting you from accessing the savings you have like in a “help to buy” or “lifetime” ISA? (If you haven’t got one might be worth looking at as it’s free money towards your house next year)
In some cases yes consistently repaying finance early can be detrimental, it shows your not using the right type of finance.
It’s almost the same as taking out a credit card and consistently being at 50% to 100% of the limit or having a overdraft and having a ‘hardcore’ debit balance.
Taking the most appropriate type of finance (not always necessary the cheapest) is important, it must fit the need of the reason for credit.
36 payments for a item your planning in paying off in 12, is probably not the right finance package for you.
Perhaps you need to look at a small bank loan or even a credit card for this type of purchase.
Nb I’m assuming this is a consumer item so the rate you’ve quoted is APR, do be aware that interest can be shown in different ways, and you should always consider what you will pay back in total rather than a quoted rate.
It’s almost the same as taking out a credit card and consistently being at 50% to 100% of the limit or having a overdraft and having a ‘hardcore’ debit balance.
Taking the most appropriate type of finance (not always necessary the cheapest) is important, it must fit the need of the reason for credit.
36 payments for a item your planning in paying off in 12, is probably not the right finance package for you.
Perhaps you need to look at a small bank loan or even a credit card for this type of purchase.
Nb I’m assuming this is a consumer item so the rate you’ve quoted is APR, do be aware that interest can be shown in different ways, and you should always consider what you will pay back in total rather than a quoted rate.
supersport said:
If you just want the history, borrow from a bank at 3.8% and let it run. It’s going to be a lot cheaper.
This. Agree with the other posts that comment on wrong type of financing option for the purchase i.e. 36 months for a 12 month loan. If your credit rating is 'good' (are you using a service like Experian to qualify your credit score, rather than what you actually think qualifies as "good"), then you should be able to get a much better rate than 9.9% - which is punitive if you compare to the actual interest rate 0.75% - via a separate financial provider. Use a comparison website to look for loans that cover your actual loan period.
Have a look at the Experian website for building credit. I was in your position back in the mid 2000s re: beside a few utility bills, little to no credit history. It took me a while to find a suitable credit card, but once I obtained a credit card I used it for nearly all my transactions (and still do) on the basis that the credit bill is paid in full at the end of the following month. Any other purchase is either 12 month interest free or a loan (seperate provider).
putonghua73 said:
supersport said:
If you just want the history, borrow from a bank at 3.8% and let it run. It’s going to be a lot cheaper.
This. Agree with the other posts that comment on wrong type of financing option for the purchase i.e. 36 months for a 12 month loan. If your credit rating is 'good' (are you using a service like Experian to qualify your credit score, rather than what you actually think qualifies as "good"), then you should be able to get a much better rate than 9.9% - which is punitive if you compare to the actual interest rate 0.75% - via a separate financial provider. Use a comparison website to look for loans that cover your actual loan period.
Have a look at the Experian website for building credit. I was in your position back in the mid 2000s re: beside a few utility bills, little to no credit history. It took me a while to find a suitable credit card, but once I obtained a credit card I used it for nearly all my transactions (and still do) on the basis that the credit bill is paid in full at the end of the following month. Any other purchase is either 12 month interest free or a loan (seperate provider).
Chestrockwell said:
Thank you for the link. I used Experian for my credit rating which is 925 that qualifies as ‘good’ and I searched up for a loan on there but because of my lack of credit history, the only loans I was offered were ones by using a guarantor. The ones without one had really high rates like 25% minimum! I’d ask my dad but I want to do something by myself for once and not ask for help etc.
Check the T&Cs of the 9.9% offer (if that's the best you can obtain due to lack of credit history) to determine if there are any penalties for early repayment. Also, have a word with Sarnie (on the Finance forum) to ascertain how the loan would impact your affordability assessment. If you are thinking of buying next year, it might be an idea to contact Sarnie anyway regarding his services - especially as he has helped out many a PHer and receives excellent feedback.Chestrockwell said:
Evening gents,
I’m trying to build my credit rating, only credit I have is my overdraft which I use once or twice a month and I pay it off immediately.
I think using your overdraft is a bad idea myself. I’m trying to build my credit rating, only credit I have is my overdraft which I use once or twice a month and I pay it off immediately.
I would start using a credit card for occasional small purchases and then pay it off in full at the end of the month via direct debit. Don't spend too much on it though, as the lender will probably look at your average spend on the CC and deduct this from your affordability.
Also make sure you are on the voters register and run a credit check on yourself also! Just to see where you are.
AndyAudi said:
You have the cash so don’t “need” to borrow (& would expect to be able to repay before house purchase if you did), you just want to do this to improve credit rating - so why borrow £3k costing you £150? (you could borrow a lesser sum for the credit history if it really mattered)
Is there something restricting you from accessing the savings you have like in a “help to buy” or “lifetime” ISA? (If you haven’t got one might be worth looking at as it’s free money towards your house next year)
Nothing free if you buy a house over 300k, I used it. You only get the bonus for houses up to 250k or something which is a bit odd, London different of course.Is there something restricting you from accessing the savings you have like in a “help to buy” or “lifetime” ISA? (If you haven’t got one might be worth looking at as it’s free money towards your house next year)
ericmcn said:
Nothing free if you buy a house over 300k, I used it. You only get the bonus for houses up to 250k or something which is a bit odd, London different of course.
Quite but given the figures being suggested I assumed (maybe wrongly) we were not talking about a purchase of that size. Not everyone is of the powerfully built director type 
Interestingly people saying cheaper finance with Bank, can anyone actually get that on a small loan?
I wondered what rates of unsecured loan I could get, just playing with my Bank app & >£5k for 1yr is 10.9%
Next tier 5.1% & I think over & £10k they’ll give 3.1%. (The app also tells me I’m “highly likely” to be approved for a £50k Loan so no issues with my credit rating)
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