Should I pay off my current loan before getting a new one?

[WD]

I currently have an auto loan for just $1,200 and my wife and I plan on getting a new car very soon.

I've heard paying off your auto loan could actually hurt your score a bit...
So, I'm curious should I pay off my loan before or after applying for a new loan?

Or does it not matter much?

I can pay the $1,200 now easily, so the amount is not an issue.

# The current loan is in my name only...my wife doesn't have a current loan.  But we will be applying for the new loan together.

Thanks all.

[kjm79]

ONLY reason I can think of to pay it off prior to get the new loan would be if DTI is an issue...otherwise, the lender will most likely pull an auto enhanced score anyways and as long as your prior auto loans are golden, so are you.  If you did pay it off before your new loan, depending on when you went, the old loan may not have even updated to show paid and closed.  I wouldn't worry about it.  If DTI is an issue then let the dealer know you can pay it off. 

[Tazman81]

I agree with kjm..  The only thing I would add is if you actually have the free funds to pay off the auto loan, then you should go ahead and do it.  That way yo are not paying interest out to the loan company unnecessarily.

[Anonymous]

1- Paying the car off, or I should say paying off an open installment loan-with no other negative entry data added, will cause a small decrease in your credit score.

2- That score drop will probably not reflect much at all in an auto enhanced score.

3-If you are planning on trading the car in, and assuming you are putting down a downpayment that also takes into account the monies outstanding on you current car (your negative equity in the deal), open loan or closed paid off loan will not effect your ability to get a new loan as the fact that you are terminating the old loan at deal inception(ie- the dealership is paying it off as part of the deal.) and that is noted in the file they send to the banks for approval.

4- if you are Keeping the old car, and keeping the loan open- that may effect your ability to get a new loan as it will go against your debt to income ratio. But that is only as long as you have an income where you outlays each month are too great with both an additional loan and an active loan to get you a new deal. 

So again:

Owing the $1,200 but going into a dealership and trading the old car in, but putting a downpayment down that will also take into account the $1,200 not a big deal at all-in fact little to no effect on your deal worthness. (by the way I have not addressed any LTV or other issues as i do not think rolling $1,200 ion negative equity will be a deal breaker)

Paying it off earl yor not will only really save you the interest you are accruing.

One caveat: Say you pay the car off on Monday and on Tuesday you want to trade it in and get a new one- you may be stymied until you receive your clear title to give to the dealership.