Credit Score Basics > Does cancelling a loan affect credit rating?

Does cancelling a loan affect credit rating?

Wollit Team3 minute read · Updated 16th September 2024

Yes, cancelling a loan can indeed impact your credit score in the UK. However, the extent depends on many things. Here is how this works.

How does cancelling a loan work?

Under the Consumer Credit Act 1974, you have a 14-day cooling-off period to cancel a credit agreement, such as a personal loan or credit card, without any penalty.

This applies to agreements made in person, over the phone, by mail order, or online.

If the agreement was signed away from the lender's premises (for example, at your home or a shopping centre), you have another 5 days from when you receive the second copy of the agreement.

During the cooling-off period, you can cancel the credit agreement by contacting the lender, verbally or in writing. If you've already received the loan funds, you'll need to repay the money and any interest accrued within 30 days.

How does cancelling a loan affect my credit score?

Whether cancelling a loan affects your credit score depends on how the cancellation happened.

If you cancel the loan application before the lender has run a credit check, there will be no impact on your credit score.

If you cancel after the lender has performed a credit check but before signing the agreement, a footprint will be left on your credit report from the lender's credit check. This might create a small drop in your credit score, but it will be usually short-lived. However, cancelling the loan will not cause any further damage to your credit score, so you don’t need to worry about that.

Finally, if you cancel during the 14 day cooling-off period, nothing more happens. The credit check will still be visible on your credit report, but no other drop in your credit score should occur.

However, you are now responsible for the debt, which needs to be repaid. This means that it will affect your debt to income ratio. While this by itself doesn’t affect your credit score, it might affect your chances of getting other loans, since lenders want to make sure that you can afford to repay your debts.

Also, cancelling multiple loan applications, even if done within the cooling-off period, can negatively impact your credit score. Lenders will see the multiple credit checks on your report, which can make you appear desperate for credit.

What happens if I cancel a loan after the cooling-off period?

If you want to cancel a loan outside the 14-day cooling-off period, you'll need to check the terms of your specific agreement. Some lenders may allow early settlement, which means you can pay off the loan early and potentially receive a rebate on interest and charges.

To settle a loan early, contact the lender and request the early settlement amount. They must give you this information within 28 days of receiving your request. Keep in mind that the rebate may be less if you're only paying off part of the loan early.

If early settlement is not an option, you'll need to continue making payments according to the original loan agreement. Failing to make payments can lead to late fees, damage to your credit score, and even lead to potential legal action from the lender – which will damage your credit score even more.

How can I cancel a loan correctly?

To make sure that cancelling a loan doesn’t affect your credit score too much, here is what you need to do:

If you're unsure about a loan, use an eligibility checker first to see if you're likely to be accepted before applying
Read the terms and conditions carefully before signing any credit agreement
Act quickly within the cooling-off period if you change your mind about the loan
Avoid applying for multiple loans in a short period, as this can affect your credit score
If you're struggling with loan payments, contact your lender or seek advice from organisations like Citizens Advice

Also, if you’re unsure about a loan because it has a high APR or perhaps the terms are not exactly what you wanted, a better solution is to improve your credit score. This will eventually give you access to much better options – loans with lower interest rate and better repayment terms.

Luckily, now there are many apps that can help you build and improve credit.

One such app is Wollit. Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies. This helps you build your credit history and directly influences your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders that you’re reliable and pay your bills on time.