How Outstanding Loans Work

An outstanding loan is a loan that has not yet been fully paid off. If you took out a loan, such as a personal loan or student loan, and are still making payments on it, an outstanding loan may appear on your credit report.

An outstanding loan may allow you to pay for things and experiences you could not otherwise afford. However, it’s also a liability that needs to be fully repaid and may impact your credit profile. 

Read on to learn what an outstanding loan is, how it affects your credit scores and borrowing power, as well as how it compares to other loan products. 

What Is an Outstanding Loan? 

An outstanding loan is a debt a borrower currently owes to a lender or creditor. The borrower has not defaulted on payments, nor has the account been sent to collections. However, the loan itself still requires payments before the account is closed. Because of this, the borrower is continuing to pay interest on the balance, and the loan continues to influence their credit scores and debt-to-income (DTI) ratio.

DTI is calculated by dividing a borrower’s total monthly debts by their gross (before tax) monthly income. Your total monthly debts include: 

• Monthly mortgage or rent payment

• Minimum credit card payments

• Auto, student, or personal loan payments

• Monthly alimony or child support payments

• Any other debt payments that show on your credit report

All of the above may affect a borrower’s DTI. However, only a loan product is considered an outstanding loan.

Recommended: What Is a Personal Loan?

Uses for an Outstanding Loan vs Personal Loan

Outstanding loans are not a unique loan product. They are simply loans that still require monthly payments. A personal loan may be an outstanding loan if the borrower is still in the process of paying it off. If you’re temporarily having trouble making your payments, you may want to consider personal loan deferment.

While an outstanding loan requires continued payments, one of the benefits of a personal loan is that it may be used for almost any purpose, including:

• Debt consolidation

• Medical bills

• Home repairs

• Wedding costs

• A vacation

• Moving expenses

• A large purchase

• Emergency expenses 

• Funeral expenses

• Pet surgery 

Personal loans aren’t typically used for paying college tuition, business expenses, or a down payment for a house. 

In addition to personal loans, the following types of loans may all be outstanding loans: 

• Mortgages

• Auto loans

• Business loans

• Student loans

Recommended: Advantages and Disadvantages of Personal Loans 

Outstanding Loan vs Personal Loan Interest Rates 

The interest rate on an outstanding loan is whatever was specified in the loan agreement. Unless you choose a variable-rate loan, your interest rate generally stays the same no matter how far along in the payment process you are. 

Personal loan interest rates currently range anywhere from 5.96%-35.99%, depending on the lender and qualifications of the borrower.

Outstanding Loan vs Personal Loan Term Length

Unless you reach a debt settlement (when your lender agrees to settle your debt on modified terms), the term length of your outstanding loan is whatever was specified in the loan agreement. If you took out a personal loan with a loan term of five years, for example, you pay down the outstanding personal loan over five years. If you’ve been making payments for two years, the remaining term length is three years.

How Does an Outstanding Loan Impact Your Credit?

There are a few ways in which an outstanding loan may both help and hurt your credit profile. These include:

• Payment history: FICO® Scores are significantly impacted by a borrower’s payment history, which accounts for 35% of a credit score. On-time payments on an outstanding loan may help borrowers build credit. However, the opposite is also true: Any missed or late payments could have a negative effect on a borrower's credit. 

• Amounts owed: The amount of debt a borrower owes also contributes to their scores. This includes the amount owed on all accounts, including outstanding loans and credit cards. It also looks at credit utilization, which is the amount you owe compared to how much credit you have available. For FICO Scores, amounts owed account for 30% of a credit score. 

• Credit mix: 10% of a person’s FICO Score is calculated by determining their credit mix. Having a mixture of both revolving credit (credit cards) and installment credit (outstanding loans) may have a positive impact on a borrower’s credit profile.

Recommended: Credit Scores: What’s Involved in Calculating and Building Your Credit? 

Do You Need Collateral for an Outstanding Loan?

Collateral is an asset that a lender accepts as security for a loan and is needed for any type of secured loan. However, there are no-collateral personal loans on the market that do not require the borrower to pledge any assets.

If the original loan required collateral, that collateral is still on the line as long as the loan is outstanding. 

Outstanding Loan Example

If a person borrows ​$10,000​ from a bank to make home improvements and has paid back ​$5,000​, it means they currently have an outstanding loan balance of $5,000. The loan remains an outstanding loan until the entire amount (principal plus interest/fees) is paid off.

Outstanding Loan vs Personal Loan: Which Is Better? 

An outstanding loan may be a personal loan, so neither is better than the other. Once any type of loan has been disbursed, it becomes an outstanding loan, which requires regular payments (principal plus interest) until it’s paid off. 

A personal loan, however, may be used to consolidate other types of outstanding loans into one loan, with one payment. Here’s a look at how it works.

Debt Consolidation

A personal loan may be used to consolidate all outstanding loans, including credit cards, auto loans, and student loans. The benefits of consolidating your debt include faster, more streamlined debt paydown and, potentially, lower interest payments. If you take out a personal loan to consolidate your other outstanding loans, you’ll then only have one outstanding loan. 

Recommended: Debt Consolidation Loans vs Personal Loans: Key Differences

Interest Rates

Using a personal loan to consolidate other outstanding loans may be beneficial if you’re able to get a lower interest rate than you’re currently paying on your other debts. This might be possible if you’ve built your credit score since applying for those other loans. 

If you’re able to secure a lower rate, you may be able to lower your monthly payments and reduce your total loan costs. To see if this is possible, you may want to shop around and compare personal loan interest rates to get a sense of what rates and terms you might qualify for.

Payment Methods

Whether or not you consolidate several outstanding loans into one, it’s important to make your payments on time and in full each month. Missed or late payments may lead to extra charges and are likely to be reported to the consumer credit bureaus. Setting up autopay for an outstanding loan could help ensure you never miss a payment due date and pay down the loan fully by its maturity date.

Applying for a Personal Loan

When applying for a personal loan, lenders typically require the following paperwork and information:

• Personal information

• Social Security Number

• Date of birth

• Full legal name

• Loan application

• Proof of identity

• License

• Passport

• Government-issued ID

• Employer contact information

• Pay stubs

• Tax returns

• Proof of address

The Takeaway

An outstanding loan is a loan that has not been paid off yet. The borrower is still responsible for monthly payments and remains so until the loan principal (as well as any accompanying fees and interest) is paid off in full. While a loan is outstanding, it may affect a borrower’s DTI, credit scores, and borrowing power.