Is Paying Off Your Car Loan Early A Good Idea?
Hanna Kielar5-minute read
PUBLISHED: September 09, 2022
Making a payment on a car or auto loan every month can feel like one debt too many, and you might assume it’d be easier to just pay the loan off and be done with it. Don’t leap into paying off your car loan early, though. There’s a lot to consider before committing to this kind of debt-payoff strategy.
Below, we’ve broken down some different ways you can pay off a car loan early – and we’ve outlined the pros and cons of this aggressive approach. Take a look and decide what strategy best suits your financial situation.
Can You Pay Off A Car Loan Early?
A standard term for an auto loan is 60 months, or 5 years, but longer terms can last 72 months or more. Unless specified in your financing documents, paying off your loan before the end of its term shouldn’t be an issue. If you’re using a personal loan as an auto loan, you can also pay this off early unless otherwise stated.
Be sure to read your loan documents carefully, as some lenders may charge a prepayment penalty for paying off a loan early.
How To Pay Off A Car Loan Early
It’s possible to pay off debt in various ways, but the key is finding the strategy that makes the most sense for your financial situation. Explore some of your options below.
Pay It Off In A Lump Sum
This can be the simplest option if you have the cash to spare. Whatever remaining balance you have on the loan, pay it off in one big swoop. This payment will also include interest and outstanding fees, so it’s wise to talk with your lender about the full loan payoff amount. A lump sum payment could be hundreds or thousands of dollars, so make sure your finances can handle a giant payment like this.
Make A Partial Lump Sum Payment
If you can’t make a full lump sum payment, see if you can make some large partial payments toward your balance. Even getting a month or two ahead on your loan payments can help you pay your car loan off faster.
Make Extra Monthly Payments
Making an extra payment each month beyond your regular monthly car payment can help you get ahead. Some borrowers also opt for biweekly payments, or a half a payment every 2 weeks. Because there are 2 months during the year when this would mean making three half-payments, you would end up making what amounts to an extra whole payment every year. Check with your lender to see if this is an option and whether they can help you set up the payments.
Increase Your Monthly Payment
If making extra payments doesn’t work for you, try paying slightly more than you owe every month. An easy way to do this is rounding your payments up. For example, if you owe $285 a month, pay $300 instead. That extra $15 may not seem like much, but it can be an affordable way to get ahead on your car loan.
Refinance Your Car Loan
Refinancing an auto loan can get you a lower monthly payment and better loan terms, possibly making it easier for you to pay the loan off early. A refinance only makes sense if your credit score or income level has improved since you first took out the loan so you can qualify for a better interest rate. The same goes for refinancing a personal loan.
Just keep in mind that refinancing a loan can trigger a loan’s prepayment penalty since your new loan will be used to pay off the old one.
Advantages Of Paying Off A Car Loan Early
Paying off your car loan early can benefit your financial situation in the following ways:
- You’ll save money. Paying off a car loan early means you can save on interest that would’ve accrued had you stuck to your regular repayment plan. Additionally, paying off your car loan will lower your auto insurance payments, so the sooner you can pay it off, the sooner you’ll have some extra cash to save or put toward other expenses.
- You can lower your DTI. Your debt-to-income (DTI) ratio measures what you owe in debts compared to how much money you make in gross monthly income. Knocking out your car loan can lower your DTI and improve your creditworthiness in the eyes of lenders if you’re looking to borrow again or refinance.
- You’ll finally own the car. The sooner you pay off a car loan, the sooner that car is completely yours. As long as you’re still making payments toward the loan, a lender can legally repossess your car if you fail to keep up with the loan payments.
Disadvantages Of Paying Off A Car Loan Early
Paying off a car loan early can have drawbacks, too. Keep these disadvantages in mind when making your decision on whether to liquidate your car debt.
- Some lenders charge prepayment penalties. As mentioned above, some auto and personal loan lenders charge a fee when a borrower pays off a loan early. This should be disclosed in your loan agreement. Weigh the fee amount against what you might save to see if an early payoff is worth it.
- Extra payments could strain your budget. If you’re not in a financial situation that allows you to put more money toward your car loan every month, there’s no sense in putting strain on your monthly finances. That money might also be better utilized if you have other high-interest debt.
- Paying off a car loan early can impact your credit. Auto and personal loans affect your credit in many ways, especially when a loan is completely paid off. A deciding factor in your credit score is your credit mix – or how many open accounts you have – and paying off a loan can temporarily lower your credit mix. This can be of concern if you plan on applying for another loan soon after paying off your car loan.
Should You Pay Off Your Car Loan Early?
Review the pros and cons of paying off a car loan early and decide if your financial situation will allow for an early payoff. You may consider paying off your loan early if:
- You have enough money in your budget to put toward extra monthly payments
- You don’t have a lot of other outstanding or high-interest debt, such as credit card debt
- You want to lower your DTI for a big future purchase
Paying off a car loan early can save you money in the long run, but you shouldn’t endeavor to do this if it might make your situation harder. You can always speak with your lender, too, about your repayment options.
Paying a car loan off early can be helpful to some people, but it may not be possible or beneficial for everyone. Carefully examine your options for paying off your loan to decide if one will work for you, and consider whether paying off the loan will really save you money.
If you’re using a personal loan as an auto loan and you’re thinking of refinancing, see what rates you qualify for by prequalifying with Rocket Loans℠.
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