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Where does the interest go if you pay off a loan early?

What's better for credit score, paying car loan off early or letting it go to full maturity?

  • I have a car loan that I owe $2700 on and there's only 10 payments left. It's a zero interest loan so I'm not paying it off to save on interest, my credit card balances are extremely low and I have plenty of cash to pay the car loan off. Now my question is what will be best for my credit score, let the loan go the remainder 10 payments or pay off now? Maybe it won't matter? I have another car payment on my credit report because it was a co-sign for my brother and he's completely faithful with his payments and pays more than minimum. I'm also possible getting a business loan soon so I want to do what's best for my credit score. If my credit score won't be impacted by paying my loan off early then I'd rather to that to have less liabilities when I apply for another loan. Thanks for your advice!

  • Answer:

    Your credit score will not improve with a paid off loan. But.. a future lender will see less debt with a loan paid off and better qualify you. Dissapointed you co-signed with someone. The lender will see you 100% equally responsible for this debt and it may reduce the amount of loan you will qualify for. With any loan it is good to have 1 or 2 years worth of payments to establish your credit. Once the loan is paid off, it will reflect positively on your credit reports for up to 10 years. So, never try to delete it for the sake of having shorter credit reports. Could you ask your brother to re-finance the car in his name only? Without this debt on your credit reports you would more easily qualify for a higher loan amount.

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Your credit score benefits by on time payments over time. The banks prefer you not to pay early, because it maximizes their profit, this is one of the reasons the credit scoring models are calculated to always favor the creditor. Do not become addicted to a credit score.

Steven

your score would only go down if you went so long without a transaction the history fell off. That is why CC are great unless you close the account you have a long history. I once went about 15 years between activity and oops I had to start all over because everything dropped of my account. Your fine I would pay of the car to help the income to debt ratio

Calvin C

Installment loans build credit by making payments over time. There is no score benefit to paying off an installment loan early -- although you will save interest. Sometimes it makes more sense to think with your pocketbook. If you've already paid on that car loan for at least 18 months, paying out the 10 month balance won't really buy you many score points. If you plan to apply for another loan, you might want to go ahead and pay off the car loan. That car loan is included in your debt to income ratio which is a big factor (bigger than your score) in the credit decision. The co-signed car loan will be included in your debt to income ratio, even tho your brother has made all the payments. If your debt to income ratio is too high, you will be turned down for a loan. Also, pay your credit cards in full every month. There is absolutely no advantage to carrying balances on credit cards. It just costs you interest.

bdancer222

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