How Does Prepayment of a Car Loan Impact My Credit Score?

Payments and Your Credit Score

Paying off your car loan early can save you money on interest charges, and it can mean getting off the hook of a vehicle payment faster. However, if the auto loan is the only thing active on your credit reports, it could lower your credit score if you pay it off early.

Your FICO credit score – the most widely used credit scoring formula – uses five categories to generate your credit score: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).

Active, positive accounts on your credit reports have a better impact on your credit reports than paying everything off early. The longer you have active accounts, the more varied those accounts are, and the better the payment history on them, the higher your credit score typically is. If you close positive accounts, you could be hurting the variety of your credit reports and your overall credit age.

However, if you have good credit the drop in score could be temporary and last only a few months. But if your car loan is the only thing being reported right now, and you pay it off early, then you could risk hurting your credit score and having an even thinner credit file.

Paying Off a Car Loan Early: Pros and Cons

Possible pros of paying your loan off early:

• Savings – If you have a high interest rate, it could save you lots of money to pay off your loan early. The drop in credit score may be worth the savings in the long run.
• Broken down vehicle – If your car no longer runs, paying interest on a broken down vehicle probably doesn’t sit well. You can also opt out of paying full coverage auto insurance on the broken-down car, too.
• Costly auto insurance – Is your full coverage car insurance expensive? Once you complete an auto loan, you can choose a less expensive policy that meets your state’s minimum requirements.

Possible cons of paying your loan off early:

• Drain your savings – If you intend on paying off your car loan early with your savings, but it’ll completely tap you out, it may not be a good idea.
• If your interest rate is low – If you want to pay off your auto loan to save on interest charges, but your interest rate is low (or even 0%!), then the drop in credit score may not be worth it.
• You’re looking to improve your credit – If you took on a car loan with the intention of building your credit history and boosting your credit score, then paying it off early has the opposite effect. The more on-time payments and the older your credit accounts are, the better off your credit score can be.

Paying Your Auto Loan Off Early: Planning Ahead

If you still want to pay off your auto loan early, then it may be worth it to take on another form of credit so there’s still something active on your credit reports. This could mean taking on another car loan or a credit card to avoid having a thin file.

Your credit score does reflect your past credit history, but open ones tell the credit scoring model that you’re handling credit well currently.

If your credit history isn’t great and you’re looking for another auto loan, then we may be able to help with that! Here at Auto Credit Express, we’ve created a network of dealerships that assist borrowers with poor credit that need car loans. To get matched to a dealer in your local area that has bad credit lending resources, fill out our free auto loan request form.