Thinking about paying your car off early? While unlikely, you may notice a few points drop off your credit score afterward. However, it could save you cash in the long run, and maybe help you with future loan opportunities.
Your Credit Score and Car Loans
Paying off your auto loan earlier than scheduled makes some financial sense, and it can ease your mind – after all, you’d have one less bill to worry about each month.
If you stayed current on the payments throughout the loan term, you’re likely to see an improvement in your credit score compared to when you first started the loan. This is because payment history is the most important aspect of the FICO credit scoring model.
However, there’s a category called credit mix, and it’s the reason you could see a small, temporary drop in your score after you pay off a debt. Credit mix is another aspect of your credit score, but it doesn't count for as much as your payment history.
Here’s a breakdown of the factors that make up your FICO credit score and how much of it they account for:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
Credit mix factors in the different types of active credit you have open. Once you pay off an installment loan, it gets closed. If you didn’t have any other installment loans being reported, such as a mortgage, you may see a little drop in your score.
However, credit mix is only 10% of your credit score. The benefits of increasing your payment history and reducing your amounts owed by paying off a car loan early far outweigh the small impact credit mix has. Let's look at some other good reasons to pay off an auto loan early.
Potential Benefits of Early Auto Loan Payoff
One of the biggest advantages of paying off an auto loan early is the potential savings in interest charges. Since car loans are almost always simple interest loans, you’re charged interest daily on the remaining balance of the loan. The faster you pay it off, the more money you save on interest charges.
If paying off the loan early is going to deplete your savings account, or if you’ve only got a few payments left, it may not be worth doing. You may not be saving that much, and you could only be losing a safety net. Remember that your payment history is the biggest factor when determining your credit score, not how quickly you pay it off.
However, if you have a very high interest rate, it may be in your best interest to pay that loan off as quickly as possible. If you have a lower interest rate, paying the vehicle off early may not be worth depleting your savings.
While the potential money savings are there if you decide to pay your loan off early, a completed auto loan shows lenders that you’ve paid off an entire loan successfully and that you were in it for the long haul.
Even if your credit score isn’t the best, it’s still likely to look good to a future lender and lower your risk as a borrower. Lenders like stable, responsible borrowers, and a borrower with a completed car loan on their credit reports looks great.
Your Next Car Loan
Paying your auto loan off early comes down to your interest rate, how much of a savings you have, and what you want to accomplish by paying it off early. Your unique financial situation should impact your decision, so take some time to weigh all the pros and cons.
If you’re considering paying off your car loan early because you want to speed up the process of getting your next auto loan, you can start right here at Auto Credit Express!
We connect borrowers with all credit types to dealerships with lending resources for many situations – at no cost. To begin, complete our car loan request form, and we’ll look for a dealer in your area with the lending resources you need for your unique situation.