Back in June, I hit my biggest credit milestone in quite some time: I paid off my 2011 Mazda 3. And, while I’ve been celebrating in my head ever since — one less monthly bill to worry about! — there were a few speed bumps (har, har, har) along the way. There also were a lot of things I did that worked out well.
So in the interest of helping out anyone else who’s taking on or paying down an auto loan or, even, installment loans in general, here’s what I learned from paying off my car.
1. Auto-Pay Is Awesome…
I made every single payment over the 5-year term of my car loan on-time and at least some of that (figurative and literal) credit should go to automatic bill pay. These services can be a great way to avoid missing payments and messing up your credit score.
2. …Just Remember to Shut if Off
And I’m talking, like, right after your final loan payment goes through, lest you should otherwise forget. I didn’t turn off my automatic payments and one month later, just as I was just starting to get excited about not paying for my car anymore, an extra $236 got debited from my bank account. The money was returned to me electronically a few days later and I was lucky enough not to need those dollars in the interim. But if you’re cash-strapped or your funds are running low that month, a mistake like that could prove stressful. You may wind up paying an overdraft fee or, worse, missing a payment on a bill due to insufficient funds. Which reminds me…
3. Set Up Alerts
I learned that an extra payment (and by extension a few hundred bucks) had been debited from my account because of a text alert notifying me that my checking account balance had dipped dangerously low. Thanks to this alert, I avoided any insufficient fund snafus. And there are other alerts offered by most financial institutions that can be similarly helpful. Some let you know when you have a credit bill that’s coming or gone past due (which can help keep your credit score in tact). Others get sent when a charge over a certain amount is made with your credit or debit card (which can help you readily spot fraud.) I highly recommend checking out what alerts your financial institution has to offer. I also suggest anyone with a loan about to close …
4. Keep an Eye on Your Mail…
Because, first, your lender is going to send a letter that lets you know what needs to be done now that the loan’s about to closed. And you’ll want to read this letter very carefully. Several times, even, for reasons we already discussed. Second, once you make your final payment, they’re going to mail you the car title (or, in the case of a home loan, the release of mortgage). And that is a document you definitely want to have in your possession, now that the vehicle (or house) is officially all yours.
5. … & Your Inbox
Just in case your lender sends you a digital notice outlining what steps you have to take as the loan closes. (See above.)
6. Carefully Read the Terms & Conditions of Whatever Service You’re Using to Pay Your Bills
Specifically because that fine print will likely dictate how you’ll get reimbursed, should you do what I did and fail to shut off your automatic loan payments. (My refund came electronically, but depending on the payment method, lender and/or your primary financial institution, you could wind up waiting for a check to come in the mail.) More broadly, auto-pay services have agreements associated with them that can dictate, among other things, when payments will remit, how many business days you can expect to wait for refunds, transfer limits and, even, who may or may not be privy to your transaction information — a document you may have completely glossed over in your rush to pay that one utility bill you almost forgot about.
7. A Little Foresight Goes a Long Way
Boy, am I glad I didn’t lease. First off, my car weathered some superficial damage during Hurricane Sandy — which happened, incidentally, during my first year of ownership. I also have a real … let’s it call, knack for driving through potholes, which, as I recently learned, left me with some pretty dented rims. I could have easily wound up paying for this damage had I decided to lease the car. (I am ultimately going to have to replace my rims; the Sandy scratches, not so much.) But knowing my propensity for potholes, I opted to buy my car instead — a decision that also worked out in that I wound up driving it far, far less than I thought it would. Less miles equals more resale value (though, in all honestly, I plan on driving it into the ground, given how nice it is not to have a car payment.)
This isn’t to say, of course, that everyone should buy their car. There are benefits to leasing and you ultimately have to weigh your options — no matter what financing we’re talking about — and decide what’s best for you. I know I’m glad I did.
8. It Pays to Have Good Credit
OK, I’m about to (humble) brag here, but, back when I bought my car, my credit was in good enough shape to qualify for 0% financing on the loan. That means, nope, I didn’t pay any interest on my car loan. And, given the lack thereof, I was able to opt for a loan with a longer term — which made my monthly payments lower and decidedly less taxing.
9. Having an Installment Loan Is Good for Your Score
I certainly benefited from having a mix of accounts in my credit profile — which, really, isn’t much of a surprise given that’s one of the major components of most credit scoring models. Scores are designed to reward you for having both revolving and installment loans. So, in other words, (yup, I’m about to nerd out here) if you only have a credit card, you could see improvement should you take on a mortgage or auto loan. (You’ve got to pay it responsibly, though.) On the flip side, if you only have a student loan, you could benefit from a credit card. That’s not to say you should go out and get, say, a personal loan just for kicks. At the end of the day, debt is debt, and it’s generally a good idea to have less, not more, of it. But it’s a facet of credit scoring to keep in mind as you responsibly build your credit file. (You can see where your credit currently stands by viewing two of your scores for free each month on Credit.com.)