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Does paying off a car loan ahead of time hurt your credit?
I've saved up money to pay off my car loan. If I pay it off, will it hurt my credit?
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Paying off your
car loan
is a smart financial move. However, it may impact your credit score, albeit temporarily.When you pay off your car loan in full, you have one less open account. This can decrease the average length of your credit accounts, which may lower your credit score by a few points.
It also decreases your credit mix, which is made up of installment loans and revolving credit. When you pay off an installment loan, this can temporarily hurt your credit score.
On the other hand, by clearing the loan, you eliminate added debt, no longer have monthly car payments, and may lower your insurance costs—all of which are financially beneficial.
But before you pay off your loan, ask your lender about potential
prepayment penalties
. Some lenders charge a fee to borrowers who pay off their loans early. This could be around 2% of your outstanding balance.If this is the case, you need to weigh the penalty against the interest you will pay over the life of the loan to ensure early payoff is the better option. This is often just as important as considering the impact on your credit score!
If you still decide to pay off your loan, you may want to rethink your car insurance. You can protect your investment with full coverage insurance, or you can drop it down to liability to save money. This is when
Jerry
becomes your greatest ally.Have a question about your coverage? Jerry’s friendly agents are here to answer your questions and provide advice on the best coverage options. As your life changes, your insurance changes, and Jerry is ready to make those adjustments for you.
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- Gregory R.
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Jerry partners with more than 50 insurance companies, but our content is independently researched, written, and fact-checked by our team of editors and agents. We aren’t paid for reviews or other content.
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