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. Under the terms of your loan agreement, you may pay less interest if you pay off principal early. If canceling early would drain your finances or make it impossible for you to pay other expenses that month, it's best to stick with your current loan repayment plan. You should not cancel your car loan early if this will lead to a precarious financial situation.
If you don't have many credit accounts, a car loan will supplement your credit history and improve the diversity of your credit report. 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. Having a combination of accounts, such as credit cards, and larger loans with fixed monthly payments can also help improve your credit score and make it more attractive to lenders. However, even though the canceled car loan will ultimately improve your credit rating, having more positive credit accounts open has a greater impact than closing.
If you're trying to establish credit or improve your credit rating, keeping an auto loan open may be more helpful than canceling it. 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. If you have an accident and the car breaks down completely, you'll need to return the value of the vehicle plus the negative equity to the lender. For example, if you have a reduced credit history (meaning you only have a few credit accounts), an auto loan will add to the number of accounts you have, helping to build your credit history.
According to Experian, a consumer credit company, your car loan stays on your credit report for up to a decade after you pay it off. If you only have a few more payments left, paying off your loan early won't save you a significant amount of interest.
