Will making an overpayment on my car loan affect my credit score?

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In this video our Consumer managing director, Paul Went, answers a key question on making overpayments on outstanding car loans.

The attention given to personal finances since the start of the pandemic has encouraged many of us to reassess how we manage our money.

Whether you’ve struggled financially due to illness or a change in circumstances a lot of households have tightened the purse strings and looked to cut back on their spending.

In contrast, some may have been lucky enough to save more than they did before as daily spending opportunities have been curbed by lockdown restrictions.

The result is that some people could have a little bit extra left at the end of the month and might be uncertain of how to make best use of that money.

One of the questions I’ve been asked as part of our current MoneySure campaign, is whether it’s a good idea to reduce regular savings to make an overpayment (an additional payment at any time during the contractual term) on a car loan, and whether this will impact an individual’s credit score?


Consider your available budget


The best place to start when thinking about this, is to calculate how much disposable income you have and work out what you could afford to put towards increasing a monthly repayment as a once off to reduce the amount of debt you have. Take a moment to breakdown your monthly income and outgoings in detail to help you to calculate an accurate figure.

However, remember this review of your finances is based only on your current financial situation, so if you have any concerns about your job security, or if your income tends to fluctuate month to month, then making an overpayment might not be the right option for you.

If you’re considering moving money from your savings, make sure you have money left that is at least 3 months of your normal earnings. This helps to support you if anything unexpected happens such as a change in your income and makes sure you’ve got a buffer to fall back on.


Double check your finance agreement


Before you make any firm decisions, check the details of your finance agreement and make sure you have flexibility in making payments and that no early repayment charges or other penalties apply.

The decision on whether this is the right thing to do will largely depend on your own individual circumstances. Paying off a car loan early, could potentially help to improve your credit score but the impact of this will vary person-to-person.

For example; If you want to repay your loan early as you would like to borrow more for a different purpose, lenders will look at your overall level of debt verses your income and how you’ve managed credit in the past to make a decision before they lend to you. If the level of debt you have is low and you’ve managed credit well in the past, it should have a positive effect on your file.

If you don’t have a proven credit history and want to try and build this up, then having a credit account open where you are meeting all the monthly repayments and paying on time could be beneficial.

Ultimately, you should try and weigh up what is most important to you at this time and what will help your financial situation most. If you have any concerns or questions about your loan, make sure you discuss your options with your lender. If you are paying high levels of interest and are in a good position to pay off the loan sooner, it may be something for you to consider. Before rushing into a decision it’s important to research the options available to you and make sure it’s the right option for you and your situation.


By Paul Went, Managing Director, Consumer Lending Division


If you’re looking for support on how best to manage your money, we have lots of useful guides and resources in the MoneySure section of our website.

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