In almost every case, it's best to pay down or pay off your auto loan before selling it or trading it in. The main concern is whether you have positive or negative equity on your loan. With negative equity, you will want to pay off your auto loan before you trade in your car.
Paying off a car loan early can save you money — provided there aren't added fees and you don't have other debt. Even a few extra payments can go a long way to reducing your costs. Keep your financial situation, monthly goals and the cost of the debt in mind and do your research to determine the best strategy for you.
Prepayment penalties
The lender makes money from the interest you pay on your loan each month. Repaying a loan early usually means you won't pay any more interest, but there could be an early prepayment fee. The cost of those fees may be more than the interest you'll pay over the rest of the loan.
Paying off your loan sooner means it will eventually free up your monthly cash for other expenses when the loan is paid off. It also lowers your car insurance payments, so you can use the savings to stash away for a rainy day, pay off other debt or invest.
If your car loan is a simple-interest loan, you pay interest based on what you owe at a given time. The sooner you pay off the loan, the less you'll spend on interest — potentially saving you hundreds of dollars.
Lenders like to see a healthy mix of revolving accounts, like credit cards, and installment accounts, like auto loans. If you pay off a car loan early and it's your only installment account, your credit score could take a hit. And if you have very few credit accounts, the hit to your score could be even greater.
Unfortunately, no, paying off your auto loan doesn't reduce your insurance rates, but it does give you more control over the type and amount of coverage you have, which can help you save money on your insurance.
Once your loan is fully paid, the lien on your car title is lifted, and the title can be released to you. At this point, the legal ownership of the car transfers from your lender to you.
Credit utilization — the portion of your credit limits that you are currently using — is a significant factor in credit scores. It is one reason your credit score could drop a little after you pay off debt, particularly if you close the account.
Paying off the loan early can put you in a situation where you must pay a prepayment penalty, potentially undoing any money you'd save on interest, and it can also impact your credit history.
If you still owe money on your auto loan, there are extra steps you need to take before making the trade. When you take out an auto loan, the car is used as collateral until all the money has been repaid. In most cases, it's in your best interest to pay off your car loan before you trade in your car.
PAY HALF YOUR MONTHLY PAYMENT EVERY TWO WEEKS
That adds up to 13 full payments a year, rather than 12. If you have a 60-month, $10,000 loan, you'll save only about $35 in interest, but you'll repay the loan in 54 months rather than 60.
Once you pay off a car loan, you may actually see a small drop in your credit score. However, it's normally temporary if your credit history is in decent shape – it bounces back eventually. The reason your credit score takes a temporary hit in points is that you ended an active credit account.
Any credit score drop is likely to be minimal
As soon as the account was updated to "paid loan" on my credit, my FICO® Score dropped by 4-6 points, depending on which of the three credit bureaus I checked.
How many miles is too many miles on a car? Between 10,000 and 15,000 miles per year is what's considered average. A car that's done 100,000 miles in 3 years - for example - is high mileage.
Once you've paid off your loan, your lien should be satisfied and the lien holder should send you the title or a release document in a reasonable amount of time. Once you receive either of these documents, follow your state's protocol for transferring the title to your name.
Paying your insurance premiums annually is almost always the least expensive option. Many companies give you a discount for paying in full because it costs more for the insurance company if a policyholder pays their premiums monthly since that requires manual processing each month to keep the policy active.
As you make on-time loan payments, an auto loan will improve your credit score. Your score will increase as it satisfies all of the factors the contribute to a credit score, adding to your payment history, amounts owed, length of credit history, new credit, and credit mix.
When you pay off a loan, the account will be updated to show that it has been paid in full. Your credit report will retain the account's payment history, however. If there were late payments on the account, they'll remain on your credit report for seven years, at which time they will be automatically removed.
The best-known range of FICO scores is 300 to 850. Anything above 670 is generally considered to be good. FICO also offers industry-specific FICO scores, such as for credit cards or auto loans, which can range from 250 to 900.
Your FICO® Score falls within a range, from 740 to 799, that may be considered Very Good. A 740 FICO® Score is above the average credit score. Borrowers with scores in the Very Good range typically qualify for lenders' better interest rates and product offers.
A FICO® Score of 730 falls within a span of scores, from 670 to 739, that are categorized as Good. The average U.S. FICO® Score, 711, falls within the Good range.
Character, Capacity and Capital.
In almost every case, it's best to pay down or pay off your auto loan before selling it or trading it in. The main concern is whether you have positive or negative equity on your loan. With negative equity, you will want to pay off your auto loan before you trade in your car.