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When should I pay off my auto loan? Credit question

Ryan

Ryan

Lifer
I currently owe about 5.7K on my Scion xB - I'm halfway into the loan period - financed for 5 years.

I currently have the ability to pay the car off, but is there any reason I should pay the loan off early, outside of the monthly expense of not having a loan payment? Would it be better for my credit if I just kept paying the monthly payments?
 
You might as well keep paying monthly since you paid most of the the interest the first 2 years unless you have money under your mattress.
 
I'm not a credit expert. That said, I've got 25 years of credit, good and bad under my belt.

DON'T PAY IT OFF YET
If the monthly payment isn't hurting you financially.
If you're not planning on applying for big credit (house) during the loan period.
If paying it off will empty your savings account. You only need ready cash when you don't have it.

DO PAY IT OFF NOW
If you've got enough saved up that after paying it off you have about 6 months of paychecks saved up.
If you plan on applying for Big Credit, i.e. a house.
 
Either way, it probably will have very little impact on your credit score. You've already established a lengthy history of paying that loan on time.

If you don't have the spare cash, or if that cash will seriously harm your ability to operate in emergencies, then don't pay it off.

If you have spare cash, cash which isn't needed for an emergency, then yes you should consider paying off the loan. But first, can you realistically earn a return higher than the loan amount? For example, if the loan is at 4% and you can earn 5% in a bank, then don't pay off the loan. Invest the money in the bank and you'll be ahead. But if your loan is higher than what you can realistically earn, then pay it off now.
 
Cool - I'll probably wait, and just pay the payments - it's financed at 3.49%. Paying it off will leave me with a couple grand in savings, certainly not enough for an emergency fund. I'll probably wait until some time next year to think about paying it off, since I'll have a significant amount saved up by then.

Thanks 🙂
 
Originally posted by: MichaelD
I'm not a credit expert. That said, I've got 25 years of credit, good and bad under my belt.

DON'T PAY IT OFF YET
If the monthly payment isn't hurting you financially.
If you're not planning on applying for big credit (house) during the loan period.
If paying it off will empty your savings account. You only need ready cash when you don't have it.

DO PAY IT OFF NOW
If you've got enough saved up that after paying it off you have about 6 months of paychecks saved up.
If you plan on applying for Big Credit, i.e. a house.
Click to expand...

Good advice. Your credit score won't be affected to any measurable amount by when you pay it off.
 
When I paid off my most recent car loan 2 years early, it had just about zero effect on my score.

Percentage of revolving credit utilization (total balances divided by total credit limits) seems to matter much more. Try to keep balances at less than 20% of the limits.
 
Originally posted by: Ryan
Cool - I'll probably wait, and just pay the payments - it's financed at 3.49%.
Click to expand...
Yep, don't get rid of a 3.49% loan. You may never get the chance to get money that cheaply again in your lifetime. What is better:
A) Guaranteed 3.49% return by paying off that loan.
B) Guaranteed 5-6% return by puting that money in a CD.
C) Possible 6-8% return by investing in stocks.
D) Unlikely 8%+ return by investing in risky schemes.

No matter what your risk desire, option (A) is not the best option.

 
Originally posted by: Ryan
Cool - I'll probably wait, and just pay the payments - it's financed at 3.49%. Paying it off will leave me with a couple grand in savings, certainly not enough for an emergency fund. I'll probably wait until some time next year to think about paying it off, since I'll have a significant amount saved up by then.

Thanks 🙂
Click to expand...

3.49% the no brainer is to put that money in a good high yield savings account like ING orange, then you're making 1.5% or so.
 
check with your instatution about early payoff. my credit union doesnt not frown upon early payoff of loans, but then again banks are different. i have my car paid till june of next yr but i still pay every month 😀
 
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