Do You Have to Pay Income Tax on a Personal Loan?
If you are thinking about taking out a personal loan, you might be wondering you have to pay income tax on a personal loan? We will answer this question in much detail below.
Do You Have to Pay Income Tax on a Personal Loan?
No, you do not have to pay income tax on a personal loan because personal loans are not taxable since the money you receive from a personal loan does not fall under the definition of income because they are borrowed funds that must be repaid. However, if a portion or all of your personal loan is forgiven, you may need to report the portion forgiven or canceled as taxable income.
Earnings and wages, on the other hand, are income because they add to your wealth, as such they are taxable. So, if you have taken out a personal loan, you do not have to report the funds dispersed to you on your income tax return. This applies to personal loans from banks, credit unions, and even friends.
When you receive a loan from a bank or financial institution, the money is almost always non-taxable because you pay a pre-determined amount of interest on the loan. However, if you take a personal loan from family or friends although you will not need to report the money as taxable income on your personal income tax return, you may be liable for other forms of tax if you receive $15,000 or more in a single year as the IRS may consider the money loaned to you a gift instead of a loan.
Do You Have to Pay Income Tax If Your Personal Loan is Forgiven or Cancelled?
Yes, if all or a portion of your personal loan debt is canceled or forgiven, you need to pay personal income tax on the portion of the loan that's forgiven or canceled. This is so because the government considers the cancelled debt as taxable income.
For example, if you borrow $4,500 from Bank of America and you were unable to make payments on the remaining $2,000 that you owe them, if the bank forgives the $2,000, you must report the $2,000 that's forgiven as taxable income because canceled debt is classified as taxable income.
The same logic applies to all other types of canceled debt, including student loan debt and medical bill debt. For example, if you have been paying back your student loan for 15 years and you have 5 years remaining if your $7,500 student loan is canceled out, you will have to report the $7,500 as taxable income on your Federal Tax Return.
That said, some student loan forgiveness programs permit borrowers to exclude the forgiven amount without any tax consequences. That said, if you've had any type of debt forgiven or canceled, you should consult with a tax attorney to ask them about any of the consequences.
What Are Personal Loans?
Personal loans include money borrowed from banks, financial institutions, employers, or through peer-to-peer lending networks. The borrowed funds can often be used to make any purchases, consolidate debts, buying a car, paying for a wedding, or making any other type of large purchase.
Personal loans are different from auto loans and home loans in that personal loans do not require collateral, meaning they are unsecured loans. So, in the event that you default on the loan, there is no collateral for the bank to repossess. This is different from car loans where the collateral is the vehicle you're driving and home loans where the home is the collateral for the loan.
Since there is no collateral for person loans, banks and financial institutions typically charge a higher interest rate on such loans to compensate themselves for taking a bigger risk on lending money.
That said, since personal loans need to be paid back, you are not required to pay income tax on them.
Are Interest Payments on Personal Loans Tax Deductible?
Not all loans are eligible for tax-deductible interest rates. However, with loans such as home loans, student loans, and business loans, you can deduct the interest you pay on such a loan. That is, you can reduce the amount of income you have to pay taxes on by deducting the interest on these loans from your income. That said, you cannot deduct the interest that you pay on a personal loan from your taxable income. However, there is one exception: if you use all or a portion of the money borrowed for a business purpose, such as renting an office or buying supplies for your business, you will be able to deduct that amount from your taxable income. That said, before you utilize this exception, you should consult with a licensed tax attorney in your jurisdiction.
What Are the Best Places to Get Personal Loans?
You can get loans from Banks and other financial institutions, such as credit unions. Credit unions tend to charge lower interest rates than mainstream banks and are more likely to lend money to people with low credit scores. Mainstream banks are likely to lend people only to people with good to excellent credit scores and people with poor credit will find it difficult to qualify for a loan from such banks.
That said, you will be able to get money from the following places:
- Banks
- Credit Unions
- Employer
- Peer to Peer Lending Networks
- Online Lenders
Frequently Asked Questions (FAQs)
1. Can you get a person loan to pay off taxes?
If you owe either the State of Federal Government money, it is possible to take out a person to pay off your tax debt. Just keep in mind that you will likely need to pay interest on the loan, but it maybe worth it if the interest on the loan is lower from the interest charged by the IRS or State Government on the outstanding amount that's due to them.
2. Is a loan considered as income for unemployment purposes?
No, the money you get from a personal loan is not considered as income for unemployment purposes. This is so because personal loans are debts that need to be repaid, therefore, they are not considered as income for purposes for unemployment. So, if you took out a personal loan, you do not have to report it as income to get unemployment. That said, it will be quite challenging to get a personal loan if you're currently on employment because the bank wants to know that you are capable of repaying them the money that you've borrowed.
3. Are loans considered as income?
No, loans, including personal loans, are not considered as income because they are debts that must be repaid. Therefore, if you took out a loan, you are not required to report it as taxable income.
Credit Builder Loan vs Personal Loan (Explained)
If you're just starting to build your credit, you may have come across a product known as a credit builder loan. We will explain what a credit builder loan is as well as the difference between a credit builder loan vs a personal loan in much detail below.
Credit Builder Loan vs Personal
A credit builder loan is a loan that's designed to increase your credit score. With a regular personal loan, you apply for the loan and if you're approved, the lender will deposit funds directly into your account before you make a single payment. With a credit builder loan, the process is a little different because before you're given money, you must make installment payments to the lender (this includes payment of interest), and the payments are deposited into a savings account.
These payments are reported to the credit reporting bureaus, boosting your credit score. After you've completed making installed payments to the lender, your funds will be dispersed to you.
With a personal loan, on the other hand, you're given the money upfront after you're approved for the personal loan, and then you are responsible for paying back the money that you borrowed.
That said, not everyone who applies for a personal loan is approved for one, so for someone who wants to build credit but cannot get a personal loan, a credit builder loan is appropriate and will help you build credit.
Obtaining a credit builder loan is much easier than obtaining a personal loan because lenders are taking less of a risk since you're paying them the money that you want to borrow before they will lend it back to you.
How to Get a Personal Loan vs a Credit Builder Loan?
You can find personal loans at almost every bank there is in the United States. To get a personal loan you must have good credit because your lender will rely heavily on your creditworthiness. The better your credit score, the higher the loan amount you will qualify for and the better the interest on your loan.
For example, a person with a 760 credit score or higher may qualify for a $20,000 personal loan at 10% interest rate, while a person with a 680 credit score will only qualify for a $13,000 personal loan at an 18% interest rate. The lower your credit score, the more interest you will be paying. Although an 8% difference rate may not seem like much at first sight, it will make a big difference on the amount you will end up paying back.
That said, obtaining credit builders loans are not as readily available as are personal loans. To find a credit builder loan, you will usually have to visit a credit union or look for an online credit builder loan provider. That said, before you choose an online credit builder loan, you will benefit greatly from reading some of the reviews for the bank before applying for the loan.
Once you have found a credit builder loan provider, you will apply for a credit builder loan in the same way you would apply for a personal. That is, you will need to provide the following personal information to the lender: name, address, date of birth, social security number, employment status, and your bank account information.
If you're approved for the loan, you may have to pay a small fee for the lender to setup your loan. After that, you'll make payments on the loan, and after you've completed the payments, the funds will be dispersed to you.
On the other hand, when you apply for a personal loan, the funds are first dispersed to you, and after that, you begin making payments on the loan. That said, the application process for a credit builder loan is similar to that of a personal loan.
Process For Obtaining a Credit Builder Loan vs Personal Loan
We will explain the difference between the process for obtaining a personal loan vs obtaining a credit builder loan.
Credit Builder Loan
- Submit an application for a credit builder loan
- If approved, a savings account is opened by your bank
- You make payments to your lender
- Payments are deposited into a savings account
- Your payments include the payment of interest
- The lender reports the payments to the credit bureaus
- Once you've finished making payments on your loan, you will receive the funds
Personal Loan
- Submit an application for a personal loan
- If approved, the funds will be deposited into an account of your choice
- You make payments + interest to your lender
- Once you've paid off the loan, your loan installment account is closed
Pros & Cons of Credit Builder Loans
Here are some of the advantages and disadvantages of credit builder loans:
Pros (Advantages)
- Your are not required to have a good credit score
- Low interest rates when compared to other personal loans
- No hard inquiry when you apply for a credit builder loan
- No security deposit to obtain a credit builder loan
- Helps build good credit
Cons (Disadvantages)
- Payments are reported to the credit bureaus, so if you miss payments, this will lower your credit score
- Credit builder loans come with hefty fees
- You will have to pay interest even though you're pre-paying the loan before funds are dispersed to you
Alternatives to Personal Loans and Credit Builder Loans
The best alternative to taking out a personal loan or credit-builder is to apply for and obtains a secured credit card. Security credit cards are great for someone who is just starting to build his credit or someone who wants to improve his bad credit.
Secured credit cards work the same way as do regular credit cards, the only difference is that to obtain a secured card, you must place a security deposit with the card issuer in order to obtain the card. Your security deposit usually determines your credit limit.
For example, if you pay a $700 security deposit, you will be given a credit card with a $700 credit limit. The card issuer will usually keep your security deposit for 12 months. The card issuer will periodically review your credit card account.
If the card issuer sees that you've been making your payments in full and on time, the card issuer may return your security deposit to you and convert your secured credit card into a regular unsecured credit card.
If the card issuer converts your credit card into a regular card, it will return your security deposit to you.
As far as how a secured credit card works, it work's exactly the same way as does a regular credit card. In fact, merchants and others will not know that you're using a secured credit card.
Also, a secured credit card will help your credit just as would a regular credit card. This is so because your payment history is reported to the credit reporting bureaus as your payments would be with a regular card.
So, if you need to build credit, you should strongly consider applying for a secured credit card instead of taking out a credit builder loan.
Credit Score Planet Frequently Asked Questions (FAQs)
1. Do you need good credit to get a credit builder loan?
No, you do not need to have good credit to get a credit builder loan. This is so because credit builder loans are designed for persons who have bad credit or are just starting to build their credit. Credit builder loans are different from personal loan where a person must have excellent credit to be approved for the loan.
2. Are credit builder loans good?
If you want to build good credit quickly, credit builder loans are a great way to do so. That said, you should consider opening a secured credit card as they are a great alternative to credit builder loans.
3. What is a credit builder loan?
With a credit builder loan, you will make payments to your lender, your lender will place the amount into a savings account, as you make payments, your payments are reported to the credit bureaus. Once you've finished making the payments, the loan provider will disperse the funds to you.
4. Can I get a credit builder loan if I have no credit?
Yes, you may be able to get a credit builder loan even if you do not have credit. This is so because credit builder loans are designed to assist consumers with building credit from scratch or rebuilding your bad credit.
Is There a Penalty For Paying Off a Personal Loan Early?
If you have some extra cash on hand, you might be thinking about paying off a personal loan that you have early. We will discuss whether it's good to pay off a personal loan early and whether there is a penalty for paying off your personal loan early in much detail below.
Is There a Penalty For Paying Off a Personal Loan Early?
Many personal loan providers place a penalty for paying off a personal loan early, the only way to know if you will be subject to a penalty for paying off your personal loan early is to consult your personal loan agreement. If there is a penalty it must be included in your agreement. All personal loans are different, so you should obtain a copy of the agreement by contacting your personal loan provider or by accessing it online.
Personal loan providers often charge penalties for paying off personal loans early so that they can obtain a portion of the interest that you would have paid prior to paying off your loan.
In some situations paying off a personal loan early may cost you more than paying it off according to your initially agreed upon schedule because of prepayment penalties imposed by some personal loan lenders.
So, to assess whether paying off a personal loan early is a good idea, you should consult your agreement and see if paying off the loan and paying the penalty is less than continuing to make payments on your loan.
If paying off the loan early will save you money on the long run, you should pay it off, however, if you will end up paying more to pay off your loan early, you should just set the money aside and continue making payments on your personal loan until you've paid it off.
That said, some personal loan lenders do not charge penalties for paying off a personal loan early. In such a situation, it makes financial sense to pay off your loan early because you will save money by not paying additional interest on the money that you've borrowed.
What is a Prepayment Penalty Fee?
A prepayment penalty fee is a fee that some personal loan lenders charge their borrowers for paying off their personal loans early. This is done by lenders to gain some of the interest that you would have paid had you paid off the loan regularly.
Charging a prepayment penalty for paying off a loan early makes sense from the perspective of a personal loan lender because they make their money through the interest that they charge for lending you money.
Can You Pay Off Your Personal Loan Early?
Yes, usually with any type of personal loan, you have the option of paying off your personal loan early, the only thing you have to pay attention to is whether you are required to pay a pre-payment penalty also known as early personal loan pay off penalty. Some lenders do not require the payment of a penalty while others do require the payment of a penalty. So, to know whether it makes sense to pay off your loan early, you should consult your personal loan agreement to see whether you have any prepayment penalty fees.
How Much is the Penalty For Paying Off Your Personal Loan Early?
The amount of the penalty or fee for paying off a personal loan is different from one lender to another. Some lenders may base your early payoff fee as a percentage of your remaining balance and others may base the penalty on the remaining interest for your loan. Lenders do this because they make money on personal loans through the interest they charge and when you pay off a loan early you're depriving them of that interest.
Regardless of how your personal loan lender calculates your early payoff fee, you should contact them and ask them to send you a copy of your loan agreement. Your agreement should spell out the terms of your early payoff. Some agreements don't have this clause while others do.
How to Avoid Paying a Penalty for Paying Off a Personal Loan Early?
The first option that you have to avoid paying a penalty for paying off a personal loan early is to take out a personal loan without a pre-payment penalty. This may seem obvious but people rarely look at their personal loan agreement to determine whether they can pay off their loan early and whether they'll have to pay a penalty. So, if you're thinking about taking out a personal loan that you may want to pay off early, ask your lender or consult your agreement to determine whether a prepayment fee applies.
If you already have a person loan that you want to pay off early, you should contact your lender and ask them about your options. Your lender may waive the entire fee or a portion of it. That said, if they refuse to waive your fee, you should assess whether the amount of interest you'll save by paying off your loan early exceeds the prepayment fee, if it does, it will be worth it for you to pay off the loan early.
The third option you have to pay off your loan early is to make bi-weekly payments on your. Doing this will you to pay off your loan within 1/2 of the time. This is a great option for someone who gets paid on a bi-weekly basis and wants to pay off his or her personal loan.
Will Paying Off Your Personal Loan Early Improve Your Credit Score?
People often believe that paying off their personal loans will immediately boost their credit score, however, the reality is that paying off a personal loan early or on time will result in a small drop in your credit score.
A slight point decrease is possible because when you pay off a personal loan, you're effectively closing down an installment account. Closing down and installment account reduces the diversity of your accounts, which tends to cause a small drop in your credit score.
That said, so long as you've made all of your payments on your personal loan accounts, rest assured that your credit score will improve within a few months of paying off your personal loan.
That said, paying off your personal early is a good idea if you're able to do so because it will save you on interest and reduce the amount of outstanding debt that you have. So, the minor drop in your credit score is just that, a minor drop, your credit score will recover fairly quickly so long as you've made your payments on time.
Credit Score Planet Frequently Asked Questions (FAQs)
1. Are penalties for paying off personal loans early legal?
Some states have outlawed penalties imposed on consumers who pay off their personal loans early. However, banks are regulated by Federal Laws and federal laws still permit the practice. So, if you are unsure as to whether you're liable for an early payment penalty, you should consult your personal loan agreement.
2. Is it bad to pay off a personal loan early?
If you have cash, it may be a good idea for you to pay off your personal loan early because you will end up paying less interest and you're reducing your debt, which is always a great thing.
3. What happens when you pay off a personal loan early?
When you pay off your personal loan, you're essentially closing down an installment account and are therefore reducing the diversity of your credit accounts. closing down an account can cause a temporary and small drop in your credit score. However, if you have made all of your personal loan payments on time, your credit score will recover fairly quickly.
4. Will I have to pay a fee for paying off my personal loan early?
Some personal loan lenders charge a fee or penalty for paying off your loan early. That said, to know whether you will be charged a penalty for an early pay off, you should look at your personal loan agreement.
How Do Title Loans Work?
Being strapped for cash is not the best feeling in the world. If you've ever seen those cheesy commercials on TV advertising title loans, you might be wondering what a title loan is and how does a title loan work? We will explain what they are and how they work in much detail below.
How Do Title Loans Work?
Title loans, commonly known as car title loans work in that a car owner who needs cash deposits his car title and keys with a lender in exchange for a short term loan. If the borrower pays back the money he owes the lender, the title to his car is returned to him, but if he fails to pay back the loan, the lender will repossess the vehicle and sell it to recoup the amount you borrowed from them.
Although you may be tempted to borrow money using a title loan, you should avoid them at all costs. Title loans are extremely expensive and failing to pay them off in time could cost you your vehicle.
Title loans are attractive to people with bad credit because car title loan lenders often do not check a borrower's credit since the loan is secured by the title of their car or motorcycle. The more valuable your car, the more you will be able to borrow.
Due to how aggressive title loan lenders are, many states such as California, Arizona, Florida, Illinois, and many more have outlawed the practice.
How Can You Get a Car Title Loan?
Although we advise against getting a car title loan, you can get a car title loan by applying online or visiting a title loan store and filling out the application in person. When you fill out the application, you will typically be asked to provide basic information, such as your name, date of birth, employment status, income, and vehicle information.
If approved, you will be able to get a loan up to 50% of the value of your car. For example, if your car is worth $10,000, you may be able to get a loan up to $5,000 without having to undergo a credit check.
Most title loan lenders will only lend you money if you have the title of your vehicle. If you're approved, you will need to deposit the title with the title loan lender, as well as an extra set of keys to the car.
Once you've deposited your keys and car title with the car title lender, you will be given the amount you're seeking to borrow.
If you pay off the car title loan, your vehicle's title and keys will be returned to you. That said, you can continue to drive your car normally while you pay off the loan.
If you do not pay off the loan, the lender will proceed to repossessing your vehicle and selling it to recover the amount of money that you failed to pay back.
If your vehicle is repossessed, some states require that the car title loan lender use the proceeds of the sale of your vehicle to pay themselves back and return the remaining amount to you. That said, some states do not have this requirement and allow the car title loan lender to keep the entire amount.
How Much Do Title Loans Cost?
Although title loans may seem like a great option for those who have bad credit and want to borrow money, title loans are very expensive, so you should be cautious before applying for one. Title loans usually charge an interest rate of 25% per month. So, if you were to borrow $1,000 for 30 days, you would need to pay $250 in interest just to borrow $1000 for 30 days.
In addition to interest, title loan lenders will charge you a finance charge, as well as a title certification fee. Finance charges usually amount to $150 and title certification costs approximately $30. So, to borrow $1,000 for 30 days, you're looking at approximately $430, which makes title loans extremely expensive. You should approach using title loans with extreme caution. This is so because if you fail to pay back the money that you borrowed, you will lose your car, which for some is one of their most valuable possessions.
Do Title Loans Hurt Your Credit?
No, a title loan is unlikely to hurt your credit because title loans are not reported to the credit reporting bureaus, as such, they have no impact on your credit score. Even applying for a title loan is unlikely to hurt your credit because credit checks are not required to qualify for a title loan. This is so because title loans are secured with the title to your vehicle. If you default, a title loan lender will repossess your car to recoup the unpaid debt you owe to them.
In the event that your title loan lender checks your credit before lending you money, a hard inquiry will only lower your credit score by 5 to 10 points. That said, your payment history is not reported to the credit reporting. So, whether you make payments or miss them, they will not affect your credit score.
Defaulting on a title loan is unlikely going to affect your credit. This is so because if you default on the loan, the title loan lender will repossess your vehicle to recoup the outstanding amount that you owe them, so it's not necessary for a title loan lender to sell the debt to a collection agency, which can cause damage to your credit by adding a collection account to your credit report.
Alternatives to Using Title Loans
If you need access to cash, here are some alternatives to using car title loans:
Personal Loan - If you have good credit, you're better off applying for a personal loan because personal loans are less expensive since they have lower interest rates and fees associated with them. If you have bad credit, you may qualify for a personal loan with lenders that cater to people with bad credit. That said, be ready to pay more in interest than someone with a good credit score.
Cash Advance - If you have a credit card that allows you to take out cash, you are better off using it to get quick cash than you are by using a title loan. That said, using a credit card for a cash advance is expensive but is still cheaper than using a title loan. That said, if you default on making payments on your credit card, you will not lose your car because credit cards are a form of unsecured debt.
Family & Friends - If you need quick cash and you have a close family member or friend, you may want to ask them to lend you the money. This way, you can avoid paying interest all together. This is a significantly better way to borrow money than using a title loan where there is a big chance that you will lose your vehicle if you do not make timely payments on the loan.
Are Car Title Loans Worth It?
If you need cash quickly and you've exhausted all other options, a car title loan will be worth it if you need quick cash and are willing to risk your vehicle. Title loans are extremely expensive, often costing more than 40% of the amount you intend to borrow. For example, if you need to borrow $1,000, you could be looking at approximately $400 in fees, making you responsible for repaying $1,400 to borrow $1,000 for 30 days. So, if you value your vehicle, you should approach them with extreme caution.
Do Title Loans Appear On Your Credit Report?
No, most title loans will not appear on your credit reporting because they're usually not reported to the credit reporting bureaus. As such, whether you make payments or fail to make them, your credit will not be affected. However, if you default on a title loan, you could lose your vehicle.
What Happens If You Do Not Pay Back a Title Loan?
If you do not pay back a title loan, the title loan lender will repossess your vehicle and sell it to recoup the amount you borrow but failed to pay back.
Is It Hard to Get a Title Loan?
If you have the title to your vehicle, you will likely be able to qualify for a loan that's worth 25% to 50% of the cost of your vehicle. That said, you should keep in mind that if you default on a title loan, your car will be repossessed and sold to satisfy the debt that you owe the lender.
How Much Money Can You Get From a Title Loan?
You will usually be able to get 25% to 50% of the value of your car by obtaining a car title loan.
Bottom Line
Title loans, commonly known as car title loans, allow a person to borrow money by depositing the title to their vehicle and a set of keys with a title loan lender in exchange for a short term loan. If the borrower pays back the money he has borrowed, his title and keys will be returned to him. However, if the person fails to pay back the money, the lender will repossess the borrower's vehicle and sell it to satisfy the unpaid debt. If you have any general questions or comments, please feel free to leave them in the comments section below.
How Much Does Your Credit Score Increase After Paying Off A Car?
If you're like most Americans, you probably financed your car, and if you're lucky enough to have paid off your car loan, you might be wondering whether paying off your car increases your credit score and how much of an increase you should expect to see. We will answer these questions in much detail below.
How Much Does Your Credit Score Increase After Paying Off a Car?
Unfortunately, when you first pay off your car, your credit score will slightly go down and will not increase. From my own experience paying off several auto loans, whenever I paid off a loan I noticed a temporary drop of 5 to 10 points in my credit score. This happens because the credit scoring models prefer to see that you have a car loan that's substantially paid off more than a completely paid off loan. This is so because when you pay off your car, you're essentially closing down a car loan installment account. Closing an installment account will reduce the mix of credit that you have, causing a small but temporary drop in your credit score.
Your credit mix matters because the credit reporting bureaus reward consumers who have a more diverse credit mix with a higher credit score. Your credit mix accounts for 10% of your credit score. So, the more diverse and the more types of accounts that you have, such as car loans, credit cards, home loans, and student loans, the better your credit score will be. As such, paying off your car essentially closes an auto loan account, which can cause a small yet temporary drop in your credit score.
The second reason paying off your car does not increase your credit score is because when you have a car loan that's almost completely paid off because you've paid off 98% of the amount that you've borrowed, this factor helps your credit score because the credit reporting bureaus take into consideration the amount of money that you owe. When you pay off your car loan, you lose this positive factor because your car loan account will appear as paid off.
That said, you should keep in mind that even if your credit score drops due to paying off a car loan, your credit score will quickly recover so long as you made all of your payments on time and continue to make payments on your other credit accounts on time.
The impact that paying off a car will have on your own credit may be different depending on what's in your credit report. For example, if you have few accounts, paying of an auto loan can result in a bigger drop in your credit score than someone who has several open accounts that are all paid on time. So, your experience will vary depending on what's on your credit report.
Having said that, even though paying off a car can cause a small dip in your credit score, it's an excellent thing to have a paid-off car. Having a paid-off account with no missed payments will remain on your credit report for 10 years and will continue to positively impact your credit score so long as it's on your credit report.
Should You Pay Off Your Car Loan Early?
If you have the money to pay off your car loan early, you should consider the pros and cons of paying it off early.
Saving Money On Interest
The biggest advantage of paying off your car early is that you will save money because you will not have to pay interest on the loan that you've taken out once you pay off the principal balance that you owe. That said, you will only save money on your loan if you have a simple interest rate car loan as opposed to a precomputed interest loan.
With a simple interest loan, the interest you must pay is computed each money on the amount of money that you owe. However, with a precomputed interest loan, the interest is computed when you first take out the loan and is baked into the amount of money that you owe. With such a loan, you will not save any money by paying off the loan early because you'll just pay the interest that you would have paid upfront since it's included in the account balance.
Pay Off Other Debt
By paying off your car early, you can use the money you've saved to pay down other debts that you may have. For example, if you have a student loan or credit card with high-interest rates, you can use the money that you're saving from paying off your car early to pay down those debts.
Penalties For Paying Off Your Loan Early
Before paying off your car early, you should check to see if your auto loan came with a prepayment penalty. A prepayment penalty is a charge that you are liable for if you choose to pay off your car loan early. Prepayment penalties are often very expensive and are designed to discourage consumers from paying off their loans early so that the lender can make as much money as possible from the interest you pay on your loan.
So, if you're considering paying off your car early, you should consult your car loan contract to see whether you'll be liable for a prepayment penalty. If you will still save money after paying this penalty, it may be worth it to pay off your car, however, if the penalty is more than the amount of money that you'll save, it may be better for you to continue making payments on your until you've paid it off.
Better Credit
It may come to you as no surprise that making payments on your car will improve your credit score. In fact, your payment history has the largest impact on your credit score, accounting for 35% of your score. So, keeping your car loan open and making payments on it for longer will definitely build stronger credit for you.
Also, if you're planning on making a large purchase, such as buying a home, you should avoid paying off your car early. This is so because, typically, when you pay off a car loan, you will notice a slight and temporary drop in your credit score. So, to avoid this small drop in your score, you should push back paying off your car until you've completed your purchase.
Bottom Line
Before paying off your car, you should make sure that you have funds set aside for emergencies and that you can continue to make payments on all of your other accounts time. If paying off your car early will put you in a difficult financial situation, you should hold off on paying off your car and just continue making your monthly payment on time.
How to Pay Off Your Car Loan Early?
You can pay off your car loan early by contacting your lender and asking them about how to proceed. Most often, if you want to pay off your car, you would just make a lump sum payment that's equivalent to the balance on the loan, as well as any interest that you've accrued through the day that you're making the full payment.
What Happens to Your Credit Score When You Pay Off Your Car Early?
Whether you're paying off your car early or you're making a regular final payment, your credit score could drop a few points after making your final car payment. This happens because when you pay off your car, you're essentially closing down an auto loan account. Whenever a big change such as this one occurs, your credit score could drop by a few points. That said, even if you notice a small drop, you should not worry as this drop is usually only temporary. If you made all of your car payments on time and continue to make on-time payments on your other accounts, your credit score will quickly recover and may even become higher than it was prior to paying off your car.
Credit Score Planet Frequently Asked Questions
1. Why did my credit score drop when I paid off my car?
Your credit score may have dropped after paying off your car because big changes, such as closing down an account can result in a small but temporary drop in your credit score. Also, when you pay off your car, you're closing down an installment account, which can cause a small drop in your credit score.
2. Is it worth paying off a car loan early?
In some circumstances it may be worth it to pay off your car loan early because you may be able to save money on interest. That said, you check your loan agreement before paying off your car loan early because you may have a prepayment penalty on your car loan.
3. Does paying off a car loan hurt your credit?
Paying off a car loan will only result in a small and temporary drop in your credit score. If you made all of your car payments on time, your score will recover quickly and may even exceed the score you had prior to paying off your car loan.
4. How can I raise my credit score?
You can raise your credit score by making all of your credit payments on time, reducing your account balances, keeping old accounts open, and not applying for too much credit within a short period of time.
5. How many points can paying off your car raise your credit score?
Making timely payments on your car can significantly raise your credit score. That said, paying off your car can cause a small temporary drop in your credit score. That said, this may last for a few months, however, if you continue to make payments on your other accounts, your credit score will go up.
What Happens If You Don't Pay Back a Payday Loan?
If you need cash quick and you don't have any other options, you may have resorted to taking out a payday loan to pay your rent, to buy gas, or to buy food, until you get your paycheck. Regardless of the reason you took out a payday loan, the consequences of not paying back a payday loan are numerous and we will discuss them in much detail below.
What Happens If You Don't Pay Back a Payday Loan?
If you don't pay back a payday loan, your payday lender will first attempt to debit your bank amount for the amount due. If that fails, your payday loan lender may then sell the outstanding debt to a collection agency. The collection agency will then attempt to collect the debt from you by relentlessly reaching out to you. The collection agency may also add a collection account to your credit report, which will cause significant damage to your credit. The average collection account can drop your credit score by up to 100 points.
So, although taking out a payday loan does not appear on your credit report because credit checks are not usually performed, when you fail to pay them on time, you could quite frankly destroy your credit.
Once a collection account is added to your credit report, it will continue to show up for seven years from the date you became delinquent on the payday loan. After seven years pass, the collection account will be automatically removed from your credit report.
The collection account will continue to drag down your credit score so long as it remains on your credit report.
Having a collection account added to your credit report could cause significant damage to your credit because your payment history accounts for 35% of your credit score, and when a collection account is reported, this signals that you're delinquent on making your payments on time, causing your credit score to drop significantly.
Alternatively, some payday loan lenders deal with those who don't pay back a payday loan by filing a lawsuit against them, obtaining a judgment against them, and garnishing their paychecks until they have recovered the amount loaned to the person.
In the past, civil judgments used to appear on your credit report, causing significant damage to your credit score. However, they no longer appear on your credit report, but if a judgment is entered against you, the payday loan lender may be able to garnish your wages until you've paid back the amount they loaned you.
Consequences of Not Paying Back a Payday Loan
If you do not pay back a payday loan, you may face the following consequences:
- Attempts to Collect - At first, payday loan lenders will relentlessly attempt to get into contact with you, calling you several times a day. If you provided any contacts when you obtained the loan, they will also contact them in an attempt to collect the money you borrowed.
- Debiting your account - When you signed your payday loan agreement, you probably agreed to allow the payday loan lender to debit the amount due from your bank account. Payday loan lenders will begin by attempting to collect the full amount due. If that does not work, they may split the amount they want to deduct in smaller portions in order to extract as much money from you as possible.
- Collection Account - In most cases, if you default on a payday loan, your debt will be sold to a collection agency, the collection agency will then add a collection account to your credit report, causing significant damage to your credit. Also, the collection agency will call you non-stop attempting to collect the outstanding debt from you.
- Damage to your credit score - If a collection account is added to your credit report, this will cause significant damage to your credit score. Collection accounts can cause a drop of 100+ points in your credit score.
- Interest & late fees - If you do not pay back a payday loan on time, your payday loan lenders will charge you late fees, as well as interest on the amount of money that you owe. As such, to avoid being charged such fees and interest, you should try your best to repay the money you borrowed on time.
- Civil judgment - Some payday loan lenders will not sell your debt to collection agencies, instead, they may sue you in civil court, obtain a civil judgment against you, and proceed to garnish your wages until they've recovered the money that you borrowed. Civil judgments do not hurt your credit since they no longer appear on your credit report, however, your paycheck will have some money taken from it to repay the payday lender.
- Difficulty obtaining credit cards and loans - If your payday loan is sent to collections, the collection agency will likely place a collection account on your credit report, causing significant damage to your credit. After a collection account is added to your credit report, it will be more difficult to obtain a credit card or loan once a creditor or lender sees the collection account and your lower credit score.
CSP Pro Tip: You should only take out a payday loan if it's extremely necessary to do so and you have no other option. Payday loans are extremely expensive, costing almost $15 for every $100 borrowed over a 2 week period. Try taking out a personal loan, as most personal loans will have better terms than a payday loan.
Can You Be Arrested If You Don't Pay Back a Payday Loan?
No, you will not be arrested for not paying back a payday loan. It is illegal for a payday loan lender to threaten you with an arrest. That said, it's quite common for payday loan lenders to threaten consumers with jail time if they do not repay the debt.
If a payday lender threatens you with arrest, you should report them to your State's Attorney General.
That said, the payday loan lender has the ability to sue you in civil court and obtain a civil judgment against you. If you are ordered to go to court and you fail to do so, you can be arrested and taken to jail for violating a court order.
That said, you should generally never violate or ignore a court order. If the court orders to appear, you should comply with the court's request to do so.
What Should You Do If You Cannot Pay Back Your Payday Loan?
If you cannot pay back your payday loan, you should not ignore the situation in hopes that it will go away. The first option that may be available to you is extending the term of repayment by asking your payday lender to extend the amount of time that you have to repay the loan. Most payday lenders will agree to such a request, especially if they belong to the Community Financial Services Association of America. This option will help you avoid significant damage to your credit.
If you have good credit, the second option that you have is to take out a personal to pay down your payday loan and other debts that you may have. Personal loans typically come with a lengthier repayment term, giving you plenty of time to repay your debt. Also, personal loans typically have low interest rates, making repay them much easier than repaying a payday loan.
If you're experiencing financial trouble, the third option that you have is to get help by contacting a credit counseling service. Such counselors will charge a fee to assess your current financial situation and will recommend the best source of action for you to take.
Credit Score Planet Frequently Asked Questions
1. What happens when you don't pay a payday loan back?
When you do not pay back a payday loan, the lender will call you relentlessly attempting to collect the debt. If that does not work, they may sell your debt to a collection agency. The collection agency will then attempt to collect the debt from you and add a collection account to your credit report, which will cause significant damage to your credit score.
2. Can you be prosecuted for not paying back a payday loan?
No, you cannot be prosecuted for not paying back a payday loan. Payday lenders will often threaten you with arrest or prosecution but that's illegal and you will never be arrested for merely failing to pay a payday loan.
3. Is not paying a payday loan a felony?
No, not paying a payday loan back is not a crime. You will not be prosecuted for failing to repay a payday loan.
4. What happens when a payday loan company takes you to court?
When a payday loan company takes you to court, they will attempt to obtain a civil judgment against you. If they're successful, they will be able to garnish your wages, meaning they will deduct the money that you owe from your paycheck and you will not be able to stop them from doing so.
5. How long do payday loans stay on your credit?
If a payday loan is sent to collection and a collection account is added to your credit report, the collection account can remain on your credit report for 7 years from the date that you first became delinquent on paying back the payday loan.