Does paying off a car loan early hurt your credit?

Getting rid of debt—like when you pay off a car loan early—is a generally good thing. But there are a few things to consider before you do it, including how it might affect your credit.

It may seem backward, but paying off a car loan early could cause your credit scores to dip. But how it could affect your scores depends, in part, on your overall credit profile. 

Key takeaways

• Paying off a car loan early can cause a slight dip in your credit scores, depending on your credit profile. 
• Any dip is likely to be temporary as long as you’re practicing responsible credit habits with other accounts.
• Paying off a car loan early can affect credit-scoring factors such as credit history, credit mix and total debt.
• You might decide to pay off a car loan early to reduce the overall interest you’ll pay or to put money toward savings.

Even before you pay it off, an auto loan, like other installment loans, can impact your credit scores in different ways:  

• Payment history: Making your car payments on time can help your credit, but missing a payment or making late payments could hurt your credit scores.
• Debt: Installment balances don’t have as much impact on credit scores as revolving credit utilization ratios do. But the balance of your loan compared to the total loan amount can still be a factor in scoring.
• Age of accounts: The average age of your accounts can also affect your scores, and a higher average age is usually best. Your car loan will typically be part of the calculation and can help your credit over time. The loan could continue to impact this as long as it stays on your credit report, which might be for up to 10 years after you pay off the loan.
• Credit mix: Having a credit mix of open installment accounts and revolving credit accounts can be good for your credit scores.

Paying off a car loan early can also have different effects on various types of credit scores. For example, your auto loan could have more of an impact on industry-specific FICO® Auto Scores than the more generic FICO Score 8.

Strangely, paying off your car loan early may not help your credit scores. Some of it has to do with a few of the factors listed above. Here are a couple of reasons:

• It lowers your debt usage. Some scoring models see a person paying off installment loans as less risky than a person with no installment loan debt. 
• It has an impact on your credit mix. If the auto loan was your only installment loan, then paying it off and closing the account could decrease your credit mix.

When it comes to paying off an auto loan, there are things to consider beyond how it could affect credit scores.

Aside from eliminating debt, there are other potential positives and reasons to pay off a car loan early—if it works for your budget:

• The car loan has a high interest rate. If you purchased a vehicle with a high-interest loan, you might consider paying it off early to reduce the amount of interest you’ll pay. Consider calculating the potential savings to help determine whether paying it off early makes sense. 
• It provides more room in your budget. Eliminating a car payment from your monthly budget can give you access to funds for other obligations or to put toward savings. And the relief of one less bill to pay each month could also be a plus.
• It would lower your debt-to-income (DTI) ratio. Paying off your loan could decrease your DTI ratio. And a lower DTI can help you qualify for other loans and better interest rates. 
• You don’t need to access your credit scores in the near future. While your credit scores might take a hit initially if you decide to pay off your car loan early, your scores could recover as you continue making other payments on time. And if you’re not planning on borrowing money or applying for other credit anytime soon, the score drop might not make as much of a difference.

Here are some situations when you may choose to keep your auto loan current or choose to put additional funds toward other things:

• Your lender charges prepayment penalties. Some lenders could make you pay a prepayment penalty if the loan is paid off early. While you could still save money overall, it may help to review the terms of the loan and find out whether the savings are worth it—or whether you’re better off using the money elsewhere.
• You have other higher-interest loans. If you have debts with interest rates higher than the interest rate of your auto loan, you might want to focus on paying off the loans with the highest interest rates first.
• You haven’t built an emergency fund. If you don’t already have one, consider whether you want to start saving money toward an emergency fund before paying off your car loan.
• Your credit will be accessed in the near future. Paying off a car loan can cause your credit scores to take an initial hit. If you’re planning on applying for a mortgage soon, for example, you might hold off on paying off your car loan early to avoid a dip in your scores.

Keep reading to find out more about how paying down an auto loan early can affect your credit.

Your credit scores may take a hit if you pay off a car loan early. Credit scores aside, it can be helpful to figure out how much you’ll save overall by paying off the loan early. Then compare that to the potential benefit of doing things like paying down other debts. That could give you a clue as to which option may be best for you.

If you’re considering paying off a loan, understanding your credit score can help you make an informed decision. CreditWise from Capital One is a tool that can help monitor your credit health and keep track of any changes to your credit report.