Over the course of a year, I probably speak with a few thousand car dealers. And the truth is a lot of them are fine, but some of them will say things that are either flat out false, misinformed or are blatant lies. This whopper, regarding paying off loans early, may be an example of the worst.
In all the years I’ve been brokering car deals, I’ve heard some doozies from dealership staff. One of my favorites was that it was “illegal” to send a written quote via the internet for “privacy reasons.” But to straight up tell a customer that paying off a loan early would be damaging to their credit is some next level stealership speak. That’s what happened here.
The story comes from a Money Matters advice column via Cleveland.com where a consumer writes in and asks why a dealer would tell them that paying a loan off early is actually bad for one’s credit score:
I can’t imagine you haven’t already covered this, but while car shopping the finance manager at the dealer mentioned that both paying off a loan early or even paying off credit card debt fully every month can hurt one’s credit score.
Are the creditors in cahoots with the credit agencies looking for ways to encourage us in be more in debt? Is this accurate and if so why?
Money Matters expert Teresa Murray, rightfully, tells the reader that paying a loan off early and not carrying a balance on your credit card is actually good for your credit for the very obvious reason that banks like it when you pay the money back to them that they lend to you. While paying your credit card balance in full is always recommended, consumers should be aware that closing a line of credit can have a temporary impact on their FICO score. This is because part of your score is based on the utilization of available credit. You can read more on this topic from our friends at Lifehacker.
I’ll go even further here and say exactly why this shady finance manager didn’t want the customer to pay his or her loan off early: Because the dealer will likely lose money.
As I’ve mentioned in previous posts, dealers can profit on your loan. Some dealers will use the tactic of offering you a huge discount with the caveat that you take their financing at some bonkers high rate. If a buyer pays the loan off too soon, usually within 60 days or less, the dealer will lose profit. So it’s in their interest to keep you paying for awhile because the longer you pay the more they make.
Recently I had a customer purchase a used Chevrolet SS in Florida, and the dealer was ready to kill the sale when they found out the customer was going to pay cash. That sounds ridiculous, and it was, but because Florida does not allow pre-payment penalties the buyer dropped a huge down payment and financed the minimum amount of $10,000 and he will just wipe out the loan after the first bill arrives.
The vast majority of states don’t allow banks to charge pre-payment penalties on car loans, and if you think you may want to pay your loan off early, do some research on the banking laws for your state and carefully read your loan agreement as there should be language in there that discusses pre-payment penalties or the lack thereof. A good finance manager will point out that you can pay your loan off early without penalty.
Getting pre-approved for your loan before you go to the dealer will often hedge against these kinds of shenanigans, but sometimes it can be worth taking the financing through the dealer especially if the rates are better than what you would have gotten elsewhere.
But the important thing to remember is that paying off your loans early is good for you, even if it may not be good for the dealer.