What happens when you pay off a car loan early?
With most loans, if you pay them off sooner than planned, you pay less in interest (assuming it has no prepayment penalties).
But that may not be true for your car loan.
Put simply, it’s because those lenders want to make money, and paying down the principal early deprives them of interest payments.
Does paying off car loan early hurt your credit?
Paying off debts early might seem like a good way to improve your credit, but paying off an installment loan like a car loan early can actually ding your score because it raises your utilization ratio. This isn’t to say you shouldn’t pay off a debt early if you find yourself with a windfall on your hands.
Do you save money if you pay off car loan early?
Yes, you can save money by paying off your car loan early. Because you are most likely more than halfway through your loan, most of your payment is currently going toward the principal. That means your savings may not be substantial if you are planning to just add a small amount to the monthly payment.
Why did my credit score drop when I paid off my car?
Credit utilization is one reason your credit score could drop a little after you pay off your debt. Paying off an installment loan, like a car loan or student loan, can help your finances but might ding your score. That’s because it typically results in fewer accounts.