Will Paying Off My Car Hurt My Credit Rating?

Dealing with a monthly car note can be one of the most stressful parts of adulting. It might be hard to believe, but some people pay more for their auto loan than they do for their mortgage or rent! If you’re in the financial position to do so, you may be wondering if paying off a car loan early can hurt your credit.

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So, should you get rid of your car note? Here are the facts you need to make an informed decision about your auto loan.

Generally, you can pay off a car loan early, but that doesn't always mean you should. (More on that later.) Here's how you can figure out whether paying off your auto loan quickly is the best option for you.

• Read your lending agreement. Your loan papers should have information about what to expect with early loan repayment, such as a prepayment penalty or other fees. 
• Talk to the lender. Loan agreements are notoriously difficult to interpret, so contact your lender with any questions about paying off your car loan early.
• Ask the dealer. Sometimes, car dealerships help pay off loans early if you lease or buy another car from the same location.

After determining whether you can legally pay off your vehicle early, it's time to assess the impact this decision may have on your credit. 

Does It Help or Hurt Your Credit Score to Pay Off Your Auto Loan?

Does paying off a car loan early hurt credit, or does paying off a car loan help credit? There's no clear-cut answer because it depends on your credit history and financial situation. If you've been asking yourself, "Will paying off my car hurt my credit?" consider these factors:

• Debt-to-income ratio: A high DTI ratio can keep you from getting other lines of credit, such as a mortgage or personal loan, but paying off your car loan may help decrease this ratio.  
• Credit mix: Paying off an account early, whether it's a car loan, credit card or another debt, can temporarily lower your credit score. This can be more problematic for someone with a limited account history than someone with multiple lines of credit in good standing. 
• Age of accounts: Financial experts often recommend having a mix of short-term and long-term loans on your credit report. Paying off a car loan early can hurt your credit if you don't have other long-term installments reflected on your credit report. 

Consider all these factors before deciding to pay off an auto loan early.

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Is There Any Benefit to Paying Off Car Loans Early?

Paying off a car loan early can hurt your credit, but it may also benefit you. You may enjoy the freedom of no longer having a monthly car note or find that early repayment eases fears about repossession due to forgotten payments. Paying off an auto loan quickly can also free up money for other expenses, such as your kids' college tuition or the down payment for a new home.

A decreased DTI ratio is another potential benefit of early repayment. Lowering your DTI ratio can help you qualify for other lines of credit, such as a loan for medical expenses or a credit card. Weigh the pros and cons carefully, and consider how paying off a car loan can impact your credit score.

When Should You Keep Your Auto Loan Instead of Paying Off Your Car?

Now that you know the potential benefits and drawbacks of paying off your car loan early, it's time to decide whether to keep your auto loan. Here are some situations when it may be best to continue with your original installment agreement rather than repaying your car loan early:

• Funds are tight. Paying off an auto loan can be expensive, and it may not be the right choice if you're struggling financially. 
• You lack credit history. Future lenders may be hesitant to give you funds if you have a limited credit history, especially if your car loan was one of the only debts on your credit report. 
• You're buying a home soon. If your credit score is barely high enough to qualify for a mortgage, your Realtor may advise waiting to pay off your vehicle.

So, can you pay off a car loan early? In most cases, yes, but consider your credit history and financial situation before you make that decision.