Does Cancelling a Personal Loan Affect Your Credit Score?

Personal loans are a convenient solution for various urgent financial needs, such as education, travel, and weddings. In fact, many people in India have taken a personal loan at some point in their lives.

However, not every loan journey ends with repayment; sometimes, borrowers may find themselves in a situation where they need to cancel the loan.

If you're considering cancelling your personal loan application, it's important to understand how this can affect your credit score. This blog will walk you through the reasons for loan cancellation, the steps involved, and the potential impact on your financial health.

Common Reasons for Personal Loan Cancellation

Before we dive into how cancelling a personal loan impacts your credit score, let's first look at why people go for loan cancellation. Personal loan cancellation can occur for several reasons. Let's find out.

Improved Financial Situation

If your financial condition has improved since applying for the loan, you may no longer need to borrow money. Cancelling the loan can help avoid additional debt and keep your financial profile clean.

Better Loan Offers

Sometimes, you may find a better loan offer from another lender after applying for the first loan. Lower interest rates, more favourable terms, or even better customer service could prompt you to cancel loan application.

Fulfilled Purpose

If you applied for a loan but managed to fulfil your financial needs through other means—such as a bonus, inheritance, or help from family, you might no longer need the loan, making cancellation a practical option.

Unacceptable Loan Terms

Loan terms may not always align with your expectations. For example, if the interest rate is higher than you initially anticipated or if there are hidden fees, you may want to cancel the loan application.

Can You Cancel a Personal Loan Application?

Yes, you can cancel a personal loan application. However, the timing of the cancellation largely determines how it affects your credit score. Let's break down the loan cancellation process into different stages to understand its impact.

Also Read: How to Get Instant Personal Loan Online?

Cancelling a Loan Application After Submission

Once you submit a personal loan application, the lender will likely access your credit report from one or more credit bureaus, such as CIBIL, to assess your creditworthiness. If you decide to cancel it before the lender's credit inquiry, it will not affect your credit score.

In this case, the loan cancel application is relatively simple, and since the lender hasn't officially made an inquiry into your credit report, it won't leave any footprint.

Cancelling a Loan Application Before Disbursal

After the credit inquiry, but before the loan disbursal, you can still cancel the loan application. At this stage, the lender has already made a formal inquiry into your credit report, which will reflect on your credit score.

However, cancelling the loan at this stage will not further damage your credit score as long as it is done before any disbursement of funds. The lender won't process the loan amount into your account, and your credit score will remain unchanged from the inquiry stage.

Cancelling a Loan After Disbursal

Things get a bit more complicated if you wish to cancel a loan after the amount has been disbursed. Most lenders provide a cooling-off period, during which you can cancel the loan, return the funds, and only pay a minimal cancellation fee.

However, once this cooling-off period ends, the loan agreement becomes binding, and cancelling the loan is no longer an option. In such cases, repaying the loan early (personal loan foreclosure) may be your best course of action, but it can involve additional fees and impact your credit score.

Impact of Loan Cancellation on Credit Score

The effect of cancelling a personal loan on your credit score largely depends on the timing of your decision:

• Before a Credit Inquiry: If you cancel the loan application before the lender pulls your credit report, your credit score will remain unaffected.
• After a Credit Inquiry: Lenders typically conduct a hard inquiry when assessing your loan application. If the inquiry has already been made and you cancel the loan before disbursal, the hard inquiry will remain in your credit report for 12-24 months.
• After Disbursal: If the loan amount is disbursed, cancelling it within the cooling-off period will involve returning the funds and paying a cancellation fee. However, beyond this period, you can no longer cancel the loan without paying it back in full. Early repayment (foreclosure) can still affect your credit score, though usually not as much as missing payments would.

Also read: Steps to Check Your CIBIL Score Using Your PAN Card

Reapplying After Cancelling a Personal Loan

If you've cancelled a personal loan application, you might still need to borrow money later. Here's what you should keep in mind before reapplying.

• Wait for some time
• Check your credit score
• Choose the right lender
• Loan amount and tenure

Factors That Affect Your Credit Score

It's not just loan applications that affect your credit scores. Several other factors come into play. To ensure you maintain a good credit profile, monitor these key elements:

• Timely payments
• Credit utilisation below 30%
• Clear existing loans before applying for new
• Limit multiple applications

Final Thoughts: Is Loan Cancellation Right for You?

Cancelling a personal loan is sometimes the best decision, especially if your financial circumstances have changed or better offers are available. However, it's important to be mindful of how and when you cancel the loan to minimise any impact on your credit score.

By understanding the loan cancellation process and its effects on your financial health, you can make informed decisions that protect your creditworthiness and ensure you're borrowing smartly.