Question: Is it better for my credit score if I keep paying on my car loan, or should I pay it off early?

August 29, 2005

Hi Tony,

I found your website while looking for information on used cars...everything your site offers has been useful, but I still have specific questions, if I may...

I currently own a 2000 Ford Focus...when I graduated from college my father took out the loan in his name so I could get a favorable interest rate, etc., seeing how I had no significant employment history prior to that point. The interest is 8.5% and we bought the car used. I've be the one making all the payments on it (2 years worth already).

I'm currently heading into my first year of graduate school where I'll be a part-time student, working full-time. I still have another 3 years left on the car loan, so I filled out and submitted the appropriate forms with my father so the equity could be transferred to my name; that is, the car loan will have my name on it soon.

With regard to school, I'm getting more money in financial aid/loans than is necessary to pay tuition (interest rate on these student loans is only 4%), so I thought after the equity transfer is completed, I'd use that money to pay off the car loan. My question is this:

Will my credit score look better, once the transfer of equity has been completed if I pay off the loan in full right away, or would it look better if I simply wait a few months and make a few consecutive payments first, and then pay it off in full?

My other question is: If I wanted to sell it or trade the car in for, let's say, a hybrid, how would that work exactly in each of these two scenarios:
1) I already paid the loan off entirely
2) I HAVE NOT paid it off yet, but am still making monthly payments on it?

Thank you for your time and input,

Ryan

Answer:

Hi Ryan,

To answer your questions:

"Will my credit score look better, once the transfer of equity has been completed if I pay off the loan in full right away, or would it look better if I simply wait a few months and make a few consecutive payments first, and then pay it off in full?"

Your credit score and your credit in general will look better once you establish a history of paying loans, credit cards etc. on time. I don't think a few payments will make much of a difference one way or another.

"If I wanted to sell it or trade the car in for, let's say, a hybrid, how would that work exactly in each of these two scenarios: 1) I already paid the loan off entirely, 2) I HAVE NOT paid it off yet, but am still making monthly payments on it."

If you trade the car to a dealer you are only going to get wholesale value for the car. The dealer might make it look on paper like you're getting more, but believe me he's only going to pay wholesale. He can go to an auction any time he wants and buy dozens of cars like yours for wholesale, so why would he give you more just because you are trading it to him?

The point is that if you trade you'll lose money. You'll always do better selling your vehicle privately and then buying a car without a trade.

If you haven't paid the car off yet you'll have to pay it off with the proceeds when you sell it. If you trade it to a car dealer the negative equity will be rolled into the new loan.

All my very best...

Tony Iorio