When you apply for a loan prospective lenders get your credit score from credit reporting agencies. They then calculate the interest rate they'll charge you based on that score. You’ll probably get a lower interest rate if you have a high credit score, which is a representation of how you use credit. While paying off a car loan is never a bad thing, a history of timely payments shows good credit management, and is good for your score.
Whey you pay off your car loan the credit agencies enter a closed or cleared status into your credit history. Prospective lenders, however, may be more interested in open loans and whether you’re making regular payments on them. They scrutinize current loans to see how often you pay late and the number of days before you make each payment. An open account that shows regular payments has a more positive effect on your credit score than a closed one.
Your credit scores depend on the information the credit agencies have available. Lenders don’t automatically report to every agency and your score will probably vary between agencies because of that. For example, small car dealers don’t always report and those that do report might report only under certain conditions. Also, dealers often sell your loan contract to third parties such as credit unions, banks and financing companies. Find out which company holds your loan contract and what their reporting procedures are before paying off your loan.
The type of loan affects how your payment shows up on your credit score. For example, if you don’t make a down payment or if the car loan is for a longer-than-average time period, it carries more risk. That might lower your score at the onset. Your score rises, however, with each on-time payment. Get all the relevant details so you know exactly how the loan affects your score.
Making a lump sum payment to pay off a car loan early won't hurt you. It shows you're responsible and honor your debts and lenders like responsible payers. However, to boost your credit scores, build a history of timely payments before you make that payoff. Some credit score formulas, such as VantageScore, put more emphasis on the first 24 months of a loan. Make consistent on-time payments during these months, and then pay off your car note if that works for you.