How Does Prepaying an Auto Loan Affect My Credit Rating?


Your payment history is the most influential factor in your credit score. If you’re looking to pay off a loan faster than you expect, it’s natural to wonder what impact this can have on your credit score.

Payments and your credit score

Prepaying your car loan early can save you money on interest charges, and it can get you off paying for a vehicle faster. However, if the auto loan is the only active thing on your credit reports, it could lower your credit score if you pay it off sooner.

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 %), loan composition (10%) and new loan (10%).

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

However, if you have good credit, the drop in score may be temporary and only last a few months. But if your car loan is the only thing reported right now, and you pay it sooner, then you could risk damaging your credit score and having an even slimmer credit report.

Paying off a car loan sooner: pros and cons

Possible advantages of early repayment of your loan:

  • Savings – If you have a high interest rate, it could save you a lot of money to prepay your loan. The lower credit rating can be worth the savings in the long run.
  • Broken down vehicle – If your car is no longer working, paying interest on a broken down vehicle is probably not appropriate. You can also refuse to pay for full coverage auto insurance on the broken down car.
  • Expensive auto insurance – Is your expensive comprehensive car insurance? Once you’ve taken out an auto loan, you can choose a cheaper policy that meets your state’s minimum requirements.

Possible disadvantages of prepaying your loan:

  • Empty your savings – If you intend to pay off your car loan sooner with your savings, but it will cost you completely, this might not be a good idea.
  • If your interest rate is low – If you want to pay off your car loan to save on interest charges, but your interest rate is low (even 0%!), Then lowering your credit rating may not be worth it. .
  • Looking to improve your credit – If you’ve taken out a car loan with the intention of building your credit history and improving your credit score, paying it off sooner has the opposite effect. The more timely the payments and the older your credit accounts, the better your credit score will be.

Prepay your car loan early: plan ahead

If you still want to prepay your auto loan, it may be worth taking some other form of credit so that there is always something active on your credit reports. This may involve taking out another auto loan or credit card to avoid having too thin a record.

Your credit score reflects your credit history, but open ones indicate to the credit score model that you are currently managing credit well.

If your credit history isn’t great and you’re looking for another car loan, we may be able to help! Here has Auto Express CreditWe have created a network of dealerships that help low-credit borrowers in need of auto loans. To be matched with a dealer in your area that has bad credit loan resources, complete our free form. auto loan application form.


About Nereida Nystrom

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