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The situation:

The term length of your auto financing is 36 months. You decide to trade your vehicle in after 12 months of ownership. You trade in your current vehicle and take out another loan for a new vehicle.

Does this process have any negative or positive effect on your credit score?

  • On one hand, you are paying off your loan in full, due to the trade in value paying off the remainder of the car loan.
  • On the other hand, your automobile financing company is doing a "hard pull" on your credit in order to approve you.

What would happen in the same scenario, but where you owe more than your car is worth?

  • Paying off the old loan, and taking out a new one, will affect your score more than how you dispose of the previous car. Though trade-in rarely gives you the best price. (It's convenient, but also an opportunity for the dealer to grab some additional cash out of your pocket. Always negotiate trade-in separately from the new car's purchase. And, seriously, consider used.) – keshlam Jan 22 '15 at 5:14
  • "Paying off the old loan, and taking out a new one, will affect your score more than how you dispose of the previous car." No doubt it affects your score somehow. Not clear as to the specifics though. – Francis MacDonald Jan 22 '15 at 15:51
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Paying off your loan in full will most likely not help your credit score, and could potentially even hurt it. Because car loans are installment loans (and thus differ from consumer credit), lenders really only like seeing that you responsibly pay off your loans on time. They don't really care if you pay it off early--lenders like seeing open lines of credit as long as you manage them well.

The hard inquiry will simply lower your credit score a few points for up to two years. So, from a credit score perspective, you're really not going to help yourself in this scenario (although it's not like you're going to be plummeting yourself either).

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