What should you expect when paying Off an Installment Loan

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What should you expect when paying Off an Installment Loan
Prepare for a change to your credit score and make plans to add extra funds into your budget.
By Annie Millerbernd Lead Writer Personal loans, "buy now, pay later" loans, cash advance apps Annie Millerbernd is a NerdWallet authority for personal loans. Prior to joining NerdWallet in 2019 she was a reporter for news across California and Texas as well as a digital content specialist for USAA. Annie's work has been mentioned by the press and was included in The Associated Press, USA Today and MarketWatch. Annie has also been quoted in New York magazine, and has appeared in NerdWallet's "Smart Money" podcast, in addition to local radio and TV. She's based within Austin, Texas.





Nov 12, 2021


Written by Kim Lowe Lead Assigning Editor The consumer lending Kim Lowe leads the personal loans editorial team. The editor came to NerdWallet following 15 years of managing the content on MSN.com which included food, health, travel and more. Her first job was as a writer for magazines which covered mortgages food, restaurant and supermarket industries. Kim earned a bachelor's degree in journalism at the University of Iowa and a Master of Business Administration from the University of Washington.







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Making the final payment on the loan is an important momentous event. It doesn't matter if you've paid off your student debt or paid off your homeowner improvement loan or own your own car, the final loan payment is a cause for celebration.
But before the balance hits zero There are a few things to know and prepare for, such as: Your credit score could change, and you'll have extra money each month.
Here's what can happen -- and what you can do -- once you pay off the loan.
Your credit score could drop
It's true paying off credit card can be .
Your credit -- the amount of credit that you're using -- is a major element in your FICO score calculation. After you have closed the loan account, the credit available will be reduced and your utilization could spike.
The age of accounts as well as the credit mix can also impact your credit score. The repayment of an installment loan that's several years old or the only installment credit you have (as contrast to credit cards' revolving credit) could also impact your score.
Once the loan account is closed, you can continue to make on-time payments toward different loans as well as credit card to improve your credit.
Your debt-to-income ratio will drop
It's the percentage of your monthly income that goes toward debt payments. When you eliminate the debt by paying off a loan, this number will be less -- and that's a good thing.
For instance, let's say your monthly earnings are $2,000. If $500 is put towards a personal loan payment and you also spend another $300 for your auto loan payment, your DTI will be 40%. When you've paid back the auto loan, it will be 25%.
Lenders use DTI to determine if you can manage the monthly payments on a new personal loan such as a mortgage, auto or loan. The lower the amount, the more favorable.
Use the extra money you earn to work
If the cash you used for loan payments is no longer needed and you are able to put it to work. Here are some alternatives:
Start or add to the emergency funds. NerdWallet recommends working toward $500 and then striving for at least three months' living expenses.
Contribute toward your 401(k). If your employer provides an 401(k) match, chip into enough funds to receive the full amount of contribution.
Pay off other high-interest debt. Making extra cash for the credit card, or higher-interest loan payments can help reduce that debt faster.
Save more for retirement. Most financial experts recommend placing between 10 and 15 percent of your income before tax into a retirement account such as a 401(k) or IRA.
Save for your next big goal. That could be a down payment on a house, kids' college education or a dream vacation.

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Find lower rates
On-time payments toward the installment and credit card loans aid in building your credit score. Therefore, after you've paid off a loan you could be eligible for a lower rate when you apply for credit.
Check out the various options for borrowing unsecured
Savings is usually the cheapest way to pay for the cost of a large vacation, wedding or house improvement project. If you're looking to finance those projects, you might want to consider using a loan with a credit card, or a personal loan.
have APRs between 5 and 36%. Lower APRs are available for people with excellent or good credit. These loans to pay for massive, one-time purchases, or to consolidate high-interest debts. Check your personal loan rate without affecting your score on credit.
tend to have APRs between 13% and 25% and are best for purchases that are small and frequent. People with good or excellent credit may qualify for a rewards program or .

Refinance
With better credit and an lower ratio of debt to income it is possible to refinance your other loans for a lower interest rate.
Private student loans have rates that are based on things like your credit and DTI. If you have private loans, consider to lower your interest rate.
Auto loan rates could have decreased since you first borrowed, or you might be eligible for a lower rate. In either scenario, it's the right time to .




About the writer: Annie Millerbernd is an individual loans writer. Her work has been published on The Associated Press and USA Today.







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