Has your financial situation changed since buying your car? Do you have extra cash and want to make a bigger dent in your car payments? You can certainly pay more on your car payment, but before doing so, make sure you fully understand the effects it will have on your auto loan, credit score, and personal finances. In this article, we’ll take a closer look at exactly how paying more on your car payments affects your credit score, so you can make an informed decision.

How Paying Extra on Your Car Loan Works

The first thing you need to know is whether your lender applies your payments to your loan principal or to the interest. Applying extra payments directly to the principal is ideal because it reduces both the amount you owe and your total interest. However, many lenders don’t apply your extra payment amount directly to the principal. Instead, they first apply it to the additional interest accrued since your last payment, then apply the rest to the principal.

What if I Make a Whole Extra Payment in Advance?

Again you need to check with your lender. Many auto lenders will treat this as an early payment of your next bill instead of applying it to the principal. If you want to make sure the extra payment will be applied directly to your loan principal, you need to find out what your lender requires for that to happen.

Benefits of Paying More on Your Car Payment

There are some good reasons you might want to pay extra on your car payment each month.

• Pay Less Interest – If you have a 60-month auto loan, you’ll pay quite a bit in interest over the life of the loan. As long as your loan doesn’t come with precomputed interest, paying extra can help reduce the total amount of interest you’ll pay.

• Pay Off Your Loan Faster – The faster you pay off your loan, the sooner you’ll free up cash to go towards other expenses or savings.

How Does Paying More on Your Car Payment Affect Your Credit?

In terms of your credit scores, paying more on your car loan is not necessarily the best thing. When you make an extra car loan payment once or twice, it likely won’t impact your credit score at all. However, if you consistently make extra payments and pay off your car loan early, it can hurt your credit score, especially if you’re just starting to build credit, don’t have many accounts, or are trying to improve your credit score.

Once your loan is paid off, that account is closed. Although closed accounts indicated you successfully managed credit in the past, open credit accounts have a greater impact on your credit score because they show lenders how well you’re managing credit in the present.

Need Credit Repair Help?

Sometimes you need expert guidance to get back on track. If your credit has been damaged, you can get it back in shape with the right strategy. We help people every day with credit repair strategies that quickly raise credit scores and ensure long term credit success.

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