Why is it bad to pay off your car loan early?

I've heard that paying off your car loan early can have some negative consequences. What are they?

Answer
It’s not inherently bad to pay off your car loan early. Paying off your loan early can help you avoid paying more interest, for example. However, paying off your loans early often decreases your credit score, at least temporarily.
If you have a robust credit report with multiple installment and revolving credit accounts, your credit mix won’t be affected too much if you pay off one car loan early. In this situation, you can expect a drop of 10 to 20 points because you now have one less account overall.
Those with lean credit reports or no other installment loans may find that paying off their car loan early can drop their score by as much as 50 points. This may be due to:
  • The closing of an account
  • Less credit mix
  • Shorter average age of other open accounts
Keep in mind that your credit score will rebound from this sooner rather than later. Don’t stress too much about this temporary drop as long as you’re continuing to make payments on your other debt.
After you’re done paying off your loan, you may want to consider changing your car insurance policy. Even if you want to keep the same coverage as your lender required, there’s a good chance you can find a cheaper quote by comparison shopping with Jerry.
Eric Schad
Answered on Oct 28, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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