One of the things which is a pain in my ass is my car loan. I figure in about six months I can pay it off in full if I pinch pennies here and there. Thing is that my car loan matures in 2009. A friend advised me that paying off early can lead to penalties and actually hurt one’s credit rating. Is this true? Does it depend on the financial institution?
You can possibly have financial penalties for paying early. It sucks, but some lenders slip that in there. Check your loan agreement. It may be called a pre-payment penalty or something similar
However, the second part is absolute bull. See this article to read about how your score is calculated.
If you have no credit history at all you may be forfieting a chance at building up a slightly longer credit history. However, there are much less expensive ways to build credit. Get a no-fee low-limit credit card and charge something small on it (like a tank of gas) and pay if off in full every month.
And congratulations for having the dedication to pay off your loan early! Knowing that you own something free and clear is a great feeling.
I don’t know how it could hurt your credit rating (other than the minor hit of it affecting the length of your credit history in the future), but yes, many car loans have pre-payment penalties. I’ve noticed it to be more prevalent in loans to people with less than stellar credit, but this could due to the fact that many who have excellent credit know to watch for this type of thing, as it could be due to targetting by lenders. It should definitely tell you in the contract if there is any such penalty.
My FICO score just went up 3 points due to that simulpost.
By the way, the very minor possible hit on the credit history would almost definitely be offset by the fact that you have eliminated some of your debt.
I paid off my loan early, with no penalty. Just called up the company and asked for the final balance and sent it in.
Believe me, the hit on your credit record will not hurt you over the long haul. There are too many companies willing to extend credit to just about anyone; my compatriot on the copy desk got an offer for his <i>dog</i>.
What everyone else said is basically true, to a point. If possible to say on this board, what company is it financed through? The big companies, Chase, Bank of America, etc. rarely charge pre-payment penalties. The second-chance finance companies such as AmeriCredit, Onyx, Primus, etc. usually charge some sort of pre-payment penalty. But if you are using the second-chance companies, your smallest worry is a pre-payment penalty because you are probably paying over 15% in interest. Also, if it was one of the latter companies, was it a simple interest loan or compound interest loan (yes, some companies still do compound interest loans)?
Concerning your credit score, it is probably better to say it like this; the more payments you pay the better your score is. For every payment you pay on time, your score should actually go up. But on a flip note, you have a higher debt ratio, which combined with other debts could actually lower your score. If you show a loan completely paid off, it could help you substantially.
You just have to weigh the pro’s and con’s: your debt, your interest rate, simple or compound, type of bank. Also, if you have credit card debt, it might make more sense just to pay off the credit cards (even if they are a lower percentage rate).
Some auto lenders will, upon observing an early pay-off on your credit report, simply decide not to write you a note.
Don’t know how wide-spread this is, and it wouldn’t prevent me from doing an early pay-off by any means.
I knew a guy who claimed to have cleverly avoided an early payment fee. He called the creditor and said, in effect: “My job situation looks uncertain, so I don’t know how much longer I’ll be able to stay on time with my payments. I’ve got some money saved, and I might be able to pay off the loan - but not the penalty. If you waive the penalty, I’ll pay now. Otherwise, I’m going to use this money to settle other debts, and you can take your chances on receiving the rest of the money.”
He said they quickly agreed. YMMV.
In my years doing this, and dealing with various lenders, I have never seen this. Although lenders prefer you keep your loan for the full term (whether 24 or 72 months), I have never seen a loan application denied because someone paid their car loans off early.
It’s anicdotal, but as near as I can tell paying off a loan early HELPS your credit rating.
I had a car loan through a credit union, made payments for a few months.
Then I figured out that I could change it to a home equity loan (through a different CU) and deduct the (considerable) interest for tax purposes. Yes, I know the potential pitfalls of this.
So I paid off the first loan after a few months.
After about another 6 months or so I got an inheritance. So I paid off the second loan.
Shortly thereafter, my CC company nearly doubled my limit, and lowered my APR without being asked.
My credit report shows only that I had these loans, and repayed them, without any late payments. It shows nothing that indicates that the two loans were actually only a single loan that was refinanced.
A credit rating or FICO score is an estimate of the RISK of loaning you money, NOT an estimate of how much you can be bled for. Paying early doesn’t really cost a lender money, as they now have that capital to loan to another customer. Your interest rate was higher based on the origional loan term, so they ended up collecting a premium rate for the shorter term loan. Paying early is a sign of lower risk, as it is obvious you were not struggling to make minimum payments. Defaults cost them money, and late payments are a sign of risky customers.
The situation I outlined happenned to a guy with really, really crappy credit. The turn-down was from one of those tertiary-market-crappiest-meanest-lender-on the market kind of companies.
Unless you paid your dues at a buy-here-pay-here place, you may never have had to deal with that particular bottom-feeder.