Paying your car loan early can affect your credit score. Every time you close a credit account, your score will drop a few points. So while it's normal, if you fall between two categories, waiting to pay off your car loan may be a good idea if you need to maintain your score for other major purchases. Timely bill payments can play an important role in determining your credit score.
Canceling and closing your car loan account may not hurt your credit, but keeping the account open could have a greater positive impact on your credit if you make payments on time and in full. Let's say you have a car loan or a personal loan and you've been making on-time payments for several years. If you're trying to establish credit or improve your credit rating, keeping an auto loan open may be more helpful than canceling it. However, if you have precalculated interest, your interest is calculated in advance at the start of the loan and the amount of interest you pay is considered fixed.
In addition to considering the effect that paying your car loan early will have on your credit score, you should also review your funding documents to see if there are any penalties for paying your loan in advance. If you cancel the loan and close the account, your payment history may not be as strong as it would be if you kept the car loan open and continued making payments. In addition, having an open car loan and making regular payments helps if you're trying to establish a credit history or improve your credit rating. If any of these debts have a higher annual percentage rate (APR) than your car loan, it might make sense to pay those balances first to save money on interest.
Paying off your car loan early can hurt your credit because positive open accounts have a greater impact on your credit score than closed accounts, but there are other factors to consider as well. Auto loans, personal loans and mortgages are the three most common types of loans that could result in an early payment penalty. A simple interest rate is calculated monthly based on what you still owe, so if you pay off your loan early, you won't have to pay the interest that would have accrued on the rest of the loan. If you cancel your only installment loan or your only revolving credit account, you will sacrifice credit diversity.
