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Is it better to pay off a car loan early?
I recently got a promotion at my job and I'm in a good position to pay off my car loan. But my wife told me it will drop my credit score if I do! Is it better to pay off my loan early, or should I continue to pay it like I have been?
Liz Jenson · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
“As strange as it may sound, it is usually better for your credit to keep your loan.
While paying off a car loan can be good for your credit if you consistently make payments on time, paying off your loan completely will cause a small drop in your credit score. This is because the loan will no longer be an active item on your credit, and therefore you will have fewer items that you are actively paying at once.
- If you only have a few items on your credit report or if you haven’t been building credit for very long, the dip may be more significant than if you have a number of other accounts in good standing.
- But if you have an extended credit history with a number of accounts in good standing that are older than your car loan, you may improve your score slightly.
Before you make your move, check with your lender to see if paying off your loan early will result in a
prepayment penalty
. Some lenders will charge you to cover a portion of the interest that they were unable to collect. While this won’t necessarily affect your credit, it is certainly something to consider.In short, several factors determine your credit score. When you have a car loan and pay it off, your score will usually drop, but there are other cases in which a paid car loan will improve your credit. You’ll need to carefully evaluate your situation (or consult a financial professional) to figure out exactly what will happen to you.
If your credit score has changed, it may affect your insurance rates. Use the
Jerry
app to make sure that you’re paying the right price for your car insurance policy. Jerry will compare quotes from top insurance companies for free!”View full answer
- Gregory R.
WHY YOU CAN TRUST JERRY
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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