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 create plans for extra money in your budget.
Annie Millerbernd Lead Writer • Personal loans, "buy now, pay later" loans, cash advance apps Annie Millerbernd is a NerdWallet authority on personal loans. Prior to joining NerdWallet in 2019 she worked as a reporter for news in California and Texas, and as a digital content specialist at USAA. Annie's work has been cited by the press and was included in The Associated Press, USA Today and MarketWatch. She's also been featured in New York magazine and was featured on NerdWallet's "Smart Money" podcast, in addition to local radio and television. She's located in Austin, Texas.





Nov 12, 2021


Written by Kim Lowe Lead Assigning Editor Consumer loans Kim Lowe leads the personal loans editorial team. Kim Lowe joined NerdWallet after 15 years in charge of the content on MSN.com, including food, health, and travel. She started her career as a writer for magazines that covered the mortgage as well as the restaurant, supermarket and mortgage industries. Kim received an undergraduate degree in journalism at the University of Iowa and a Master of Business Administration from the University of Washington.







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Paying off a loan is a significant milestone. If you've cleared your student debt, paid off a house improvement loan or purchased your car outright, making your last loan payment calls for celebration.
But before the balance hits zero, there are a few things to know and prepare for, for example the possibility that your credit score will alter, and you'll be able to get additional money each month.
What could happenand what you can do once you pay off your loan.
Your credit score could sink
You read that right paying off credit card can be .
Credit -- the portion of total available credit that you're usingis an important aspect of how you calculate your FICO score calculation. After you have closed the loan account, your credit available will be reduced and your utilization could spike.
The age of your accounts as well as your credit score also affect your credit score. When you pay off an installment loan that's a few years older or the sole installment credit you've (as as opposed to credit cards' credit that is revolving) can affect your score.
Once the loan account is closed, you can continue to make regular payments towards other loans as well as credit card to strengthen your credit.
The ratio of your debt to income will decrease.
The percentage of your monthly earnings which is used to pay debts. When you eliminate the obligation to pay off a loan, this number will be lower -- which is a good thing.
As an example, suppose you earn $2,000 per month. If $500 goes toward the personal loan payment and you also spend an additional $300 on an auto loan payment, your DTI is 40 percent. After you have paid back the auto loan the amount will increase to 25%.
Lenders employ DTI to determine whether you can afford the monthly payment for a brand new personal loan such as a mortgage, auto or loan. The lower the number, the more favorable.
Use the extra money you earn to use
Once the cash you used to make loan payments has been repaid then you can use it for other purposes. Here are some alternatives:
Start by adding to the emergency funds. NerdWallet recommends working towards $500, then working towards at least three months' expenses for living.
Contribute to your 401(k). If your employer offers the option of a 401(k) match, put in enough money to get its entire contribution.
Pay off other high-interest debt. Making extra cash for the credit card, or higher-interest loan payments will help you reduce the amount of debt faster.
Make sure you save more for retirement. Most financial experts recommend putting 10% to 15 percent of your pretax earnings in a retirement savings account, such as an IRA, 401(k) as well as an IRA.
Save for your next big goal. This could be a downpayment for a home, your children's college education, or a dream vacation.

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Look for lower rates
On-time payments toward credit cards and installment loans help build your credit score, and when you pay off the loan you may qualify for a lower rate when you apply for credit.
Compare unsecured borrowing options
Savings are typically the most affordable way to pay for a big vacation, wedding or home improvement projects. However, if you have to fund these projects, you might want to consider a cash-back credit or personal loan.
They have APRs that range from the 5% to 36% range. Lower APRs are reserved for borrowers with good or excellent credit. The borrower can take advantage of these loans to fund massive, one-time purchases, or to consolidate debts with high interest. Check your personal loan rate without hurting your score on credit.
typically have APRs between 13% to 25% and are best for small, regular purchases. People with good or excellent credit may qualify for a rewards program or .

Refinance
With higher credit scores and an lower ratio of debt to income could allow you to refinance other loans to lower the interest rate.
Private student loans are based on things like your credit and DTI. If you're a homeowner with private loans think about lowering the rate.
Auto loan rates may have dropped when you first took out a loan, or you might be eligible for a lower interest. In any scenario, it's the right time to .




About the author: Annie Millerbernd is a personal loans writer. Her work has been published in The Associated Press and USA Today.







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