Getting rid of debtâlike when you pay off a car loan earlyâis a generally good thing. However, there are a few things to think about before proceeding, such as potential credit implications.
It may seem backward, but paying off a car loan early could cause your credit scores to dip. But how it could affect your scores depends, in part, on your overall credit profile.
So, you’re thinking about paying off your car loan early That’s awesome! It’s a great way to save money on interest and get out of debt faster But before you jump in, there are a few things you need to know.
The Good News: Paying Off Your Car Loan Early Can Save You Money
Let’s start with the positives. When you pay off your car loan early, you’ll save money on interest. This is because you’ll be paying off the principal balance of the loan faster, which means less money goes towards interest charges. The exact amount you’ll save depends on your interest rate, the remaining loan balance, and how much extra you pay each month.
For example let’s say you have a $20000 car loan with a 5% interest rate and a 60-month term. If you make the minimum payments, you’ll end up paying over $2,500 in interest. But if you pay an extra $100 per month, you’ll pay off the loan in 48 months and save over $1,000 in interest.
The Not-So-Good News: Paying Off Your Car Loan Early Could Hurt Your Credit Score
Here’s the catch: paying off your car loan early could actually hurt your credit score in the short term. This is because your credit score is based on several factors, including your credit history and credit utilization. When you pay off a loan early, you’re essentially shortening your credit history and lowering your credit utilization ratio.
Your credit history is a record of how you’ve handled credit in the past. The longer your credit history, the better. When you pay off a loan early, you’re essentially removing a positive entry from your credit history. This can lower your credit score by a few points.
Your credit utilization ratio is the amount of credit you’re using compared to your available credit. When you pay off a loan, you’re freeing up credit that was previously being used. This can lower your credit utilization ratio, which can also lower your credit score.
However, the impact of paying off your car loan early on your credit score is usually temporary. As long as you continue to make on-time payments on your other debts, your credit score should recover within a few months.
So, Should You Pay Off Your Car Loan Early?
Ultimately, the decision of whether or not to pay off your car loan early is a personal one. There are both pros and cons to consider. If you’re looking to save money on interest and get out of debt faster, then paying off your car loan early could be a good option for you. However, if you’re worried about your credit score, you may want to wait until you have a more established credit history.
Here are a few things to consider before making a decision:
- Your interest rate: If you have a high interest rate, then you’ll save more money by paying off your loan early.
- Your remaining loan balance: If you have a large loan balance, then you’ll save more money by paying off your loan early.
- Your budget: Can you afford to make extra payments on your loan each month?
- Your credit score: Are you comfortable with your credit score taking a slight hit in the short term?
Speak with a financial advisor if you’re unsure if paying off your auto loan early is the best course of action for you. With their assistance, you can balance the advantages and disadvantages and arrive at the most financially advantageous choice.
Additional Resources
- Capital One: Does Paying Off a Car Loan Hurt Your Credit?
- Chase: The Pros and Cons of Paying Off a Car Loan Early
- NerdWallet: Should You Pay Off Your Car Loan Early?
How could paying off your car loan early hurt your credit scores?
Strangely, paying off your car loan early may not help your credit scores. Some of it has to do with a few of the factors listed above. Here are a couple of reasons:
- It lowers your debt usage. According to some scoring models, a person who pays off their installment loans is less dangerous than someone who has no debt from them.
- It has an impact on your credit mix. Paying off the auto loan and closing the account could lower your credit mix if it was your only installment loan.
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December 19, 2023 |7 min read
Getting rid of debtâlike when you pay off a car loan earlyâis a generally good thing. However, there are a few things to think about before proceeding, such as potential credit implications.
It may seem backward, but paying off a car loan early could cause your credit scores to dip. But how it could affect your scores depends, in part, on your overall credit profile.
Key takeaways
- Depending on your credit profile, paying off a car loan early may result in a minor decline in your credit scores.
- As long as you’re maintaining responsible credit practices with other accounts, any dip is probably just temporary.
- Early car loan payback can have an impact on credit-scoring variables like credit history, credit mix, and total debt.
- You may choose to put money toward savings or to pay off a car loan early in order to lower the total amount of interest you will pay.
Is it good to pay off a car loan early? | Paul Hutchings
FAQ
Is it a good idea to pay off car loan early?
Why did my credit score drop 100 points after paying off my car?
Do you get money back if you pay your car off early?
What happens if I pay an extra $100 a month on my car loan?
Can I pay off my car loan early?
If you decide it makes sense for you, you’ve got a couple options for paying off your loan ahead of schedule. One way to pay off your car loan early is to make one lump payment. Contact your lender to find out your car loan payoff amount and ask how to submit it. The payoff amount includes your loan balance and any interest or fees you owe.
Do lenders charge a penalty for paying off a car loan early?
Some lenders charge a penalty for paying off a car loan early or making extra payments. Check your loan contract to see if your lender has one. If your lender does charge a prepayment penalty, compare the cost to the potential savings you might get from accelerating your payoff schedule.
Does paying off a car loan early hurt your credit score?
Paying off your car loan early will hurt your credit score, but only in the short term because having an open credit account that you regularly make payments on has a greater positive impact on your credit score overall. However, there are other factors to consider as well. Here’s what you need to know.
Should you pay back your auto loan early?
Paying back your lender early can be a good move for a number of reasons. Here are a few. When you make your monthly payment on an auto loan, you’re paying both the principal, which is the amount you borrowed, and the interest and any fees, which is the cost of borrowing.