Paying off car loan early?

[Anonymous]

Because I've never owned a home or paid a mortgage, the only loan I've ever had is my car loan.  I'm looking at buying a house next year, and in the meantime have about 13,000 left on my car loan (60 month loan with about 40 months left).  I've heard that continuing to pay the loan helps my credit rating somehow, as opposed to just paying it off right now?  Is this true?  How do I know when the right time to pay off the loan is so that I maximize the amount of "good" it does for my credit rating.  I'm completely confused about this. 

PS I have the money to pay off the loan right now, which would be one less monthly expense I have when I go to get a home loan which is why I'm considering it.

[MarineVietVet]

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@Anonymous wrote:

Because I've never owned a home or paid a mortgage, the only loan I've ever had is my car loan.  I'm looking at buying a house next year, and in the meantime have about 13,000 left on my car loan (60 month loan with about 40 months left).  I've heard that continuing to pay the loan helps my credit rating somehow, as opposed to just paying it off right now?  Is this true?  How do I know when the right time to pay off the loan is so that I maximize the amount of "good" it does for my credit rating.  I'm completely confused about this. 

PS I have the money to pay off the loan right now, which would be one less monthly expense I have when I go to get a home loan which is why I'm considering it.

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Welcome to the forums.

You'll likely get different opinions about this but for me paying off debt as fast as possible is always a good thing. Being debt free trumps a score any day!!

FICO likes to see a mix of credit (credit cards, mortgage, installment loans, etc.) but that mix is only 10% of your total score. When you go to apply for a home and your scores are good enough and other criteria such as DTI and employment history are allright I see no problem not having that mix.

After you pay off the car loan it will continue to show on your credit for up to 10 years which helps your AAoA (Average Age of Accounts) and credit length history.

My advice? Pay that car loan balance and enjoy a debt free ride.

From a BK years ago to:
9/09 EX pulled by lender 802
3/10 EQ- 800
4/10 TU -772

You can do the same thing with hard work

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[smallfry]

If you are concerned about saving money/showing less debt why not pay the car down to a minimal amount yet still keep it open? Closing your only installment will likely hurt your credit scores. What are they currently?

[Imhotrodcrazy]

I agree, pay that car loan off.  There is nothing better than the feeling of being debt free.  After the car loan is paid off, keep paying that loan monthly, to yourself,  in the form of a savings account.  We all need something put away for a  rainy day. 

[llecs]

OP, I vote to pay it off early.

Early last year I had the opportunity to pay my one and only installment early (also a car loan). They reported religiously on the first of each month, so I pulled my FICO scores the day before and the day after. I found that EQ increased 8 points and TU decreased 5 points. This was paying off around $5000 of the org. $25k approx loan. In other words, this open installment hurt EQ but helped TU. IMO, losing or gaining a few points is certainly worth saving hundreds of dollars. Plus your debt-to-income ratio, though not a part of FICO scoring, will be better off come mortgage time.

ETA....if this is your only open credit item and you have no CCs, then my answer would be different.

[Anonymous]

Welcome to the forums!

Having had an installment loan for which you had no lates is a positive for your FICO.  For your score, exactly what the difference is between it being paid off or still open is not as important as having had it, I don't think.  And the loan should show on your report for 10 years.

On the other hand, that car loan is costing you money.  I can think of a few reasons NOT to pay off the loan.  For instance, perhaps paying off the loan will leave you with no cash cushion.  It's a good idea to have some cash in the bank to handle sudden emergencies or if your income stream is interrupted.  Or maybe that money should be used as all or part of your house down payment.

On the other hand, that loan is costing you some money.  Assuming a $13,000 loan at 5% for 3 years, that loan will cost you over a $1000 in interest.  Assuming 10% interest for the same time period and the cost is over $2000.

Good luck!

[smallfry]

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@llecs wrote:

OP, I vote to pay it off early.

Early last year I had the opportunity to pay my one and only installment early (also a car loan). They reported religiously on the first of each month, so I pulled my FICO scores the day before and the day after. I found that EQ increased 8 points and TU decreased 5 points. This was paying off around $5000 of the org. $25k approx loan. In other words, this open installment hurt EQ but helped TU. IMO, losing or gaining a few points is certainly worth saving hundreds of dollars. Plus your debt-to-income ratio, though not a part of FICO scoring, will be better off come mortgage time.

ETA....if this is your only open credit item and you have no CCs, then my answer would be different.

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Why lose points at all? I have paid off all but 7 dollars of a 25K auto loan. My next and last payment is due 5/2013. How much interest am I paying? 

[llecs]

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@smallfry wrote:

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@llecs wrote:

OP, I vote to pay it off early.

Early last year I had the opportunity to pay my one and only installment early (also a car loan). They reported religiously on the first of each month, so I pulled my FICO scores the day before and the day after. I found that EQ increased 8 points and TU decreased 5 points. This was paying off around $5000 of the org. $25k approx loan. In other words, this open installment hurt EQ but helped TU. IMO, losing or gaining a few points is certainly worth saving hundreds of dollars. Plus your debt-to-income ratio, though not a part of FICO scoring, will be better off come mortgage time.

ETA....if this is your only open credit item and you have no CCs, then my answer would be different.

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Why lose points at all? I have paid off all but 7 dollars of a 25K auto loan. My next and last payment is due 5/2013. How much interest am I paying? 

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You can lose points if it is your one and only installment TL and the mix of credit helped your FICO score. YMMV based on your report, scoring bucket, etc. Once a loan is paid, it is removed from the mix of credit.

In your example, you are paying very, very little on $7. A penny? I was commenting on OP's case where he/she is thinking about paying off $13000 now to avoid interest, in part, or letting it drag out over the next 40 months which would result in quite a bit of interest paid.

[smallfry]

I understand that completely. Just seems as if the blanket catch all advice from some is to pay it off. If you can pay off all but a nominal amount and it is your only open installment then that is the way to go. I understand some creditors do not allow you to do what NFCU has allowed me to do.

[MarineVietVet]

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@smallfry wrote:

I understand that completely. Just seems as if the blanket catch all advice from some is to pay it off. If you can pay off all but a nominal amount and it is your only open installment then that is the way to go. I understand some creditors do not allow you to do what NFCU has allowed me to do.

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That's only my opinion and yes paying off every penny of debt as fast as possible without consideration for points or AAoA or credit length history is how I manage my finances because my scores have reached the point where I can do that. But that's just me. What works for others is just as important and I would never say it's the wrong approach.

My opinion doesn't bind anyone else or make their opinion wrong. What you propose will absolutely work but I've never (to my knowledge) had an installment loan that you could pay ahead all but a few dollars to stretch out the life of the loan. Perhaps I need to read the fine print more closely. 

From a BK years ago to:
9/09 EX pulled by lender 802
3/10 EQ- 800
4/10 TU -772

You can do the same thing with hard work

Credit Scoring 101
Common Abbreviations
Frequently Requested Threads
Whats In Your FICO Score