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Show Should you pay off your car loan early? This question may sound like a no-brainer, but the answer isn't as simple as it seems. In some cases, paying off your car loan early can negatively affect your credit score. Paying off your car loan early can hurt your credit because open positive accounts have a greater impact on your credit score than closed accounts—but there are other factors to consider too. Before you rush to write that last check to your lender, here's what you need to know. Whenever you make a major change to your credit history—including paying off a loan—your credit score may drop slightly. If you don't have any negative issues in your credit history, this drop should be temporary; your credit scores will rise again in a few months. After it's paid off and the account is closed, your car loan will remain on your credit report for up to 10 years, and as long as you always made your payments on time, the loan will continue to have a positive effect on your credit history. So what's the problem with paying off your car loan early? Even though closed accounts still affect your credit score, open positive credit accounts have more of an impact than closed ones. That's because open accounts show lenders how well you're managing your credit right now—not in the past. If you're trying to establish credit or improve your credit score, keeping a car loan open could be more helpful than paying it off. For example, if you have a thin credit file (meaning you only have a few credit accounts), a car loan will add to the number of accounts you have, helping to build your credit history. A car loan also helps to improve your credit mix by diversifying the types of credit you have. Having both revolving credit (such as credit cards that allow you to carry a balance) and installment credit (loans with a fixed monthly payment) can improve your credit mix, which can help boost your credit score. When Is It a Good Idea to Pay Off Your Car Loan Early?There are some situations when paying off your car loan early may be a smart move:
When Is It Better to Keep the Loan?Here are some situations when you're better off keeping your car loan:
To Pay or Not to Pay?Should you pay off your car loan early? To make the right decision, consider your credit history, credit score and credit mix; the interest rate on the car loan and potential savings; and whether the money you'd spend paying off the car loan in a lump sum would be better spent elsewhere, such as paying down high interest credit card balances or building an emergency fund. If you're not sure what your credit score is, get a free credit report to check your credit history, credit score and credit mix. |