Paying off a car loan early may be a fantastic concept. That may make sense at times, but there are better ways to spend or save any additional money. Before making any big financial choices, you should consult with a financial advisor and examine the advantages and drawbacks of paying off a vehicle loan early.
Can you pay off a car loan early?
Paying off your auto loan early is doable, but read your finance documentation first to determine whether there is a penalty for doing so.
Pay it all with a lump-sum payment
The first alternative is to pay off the outstanding loan debt in one lump sum payment. If you’re interested in this option, you can find out the remaining cost of your loan as well as any additional fees that may come with paying early by contacting your lender.
Pay a little extra each month
Another option is to pay a little bit more each month by rounding up your payments to the closest $100. For example, if your monthly auto payment is presently $275, you may round it up to $300 and pay an additional $25 every month. This may take longer than paying off the auto loan in one single amount, but it may be a suitable option if you just have a little extra money each month to spare.
Make a payment every two weeks
Making payments on your car every two weeks rather than monthly will also help you pay off the loan sooner. Paying half of your monthly payment every two weeks results in a total of 26 payments each year, which is similar to making 13 monthly payments rather than 12. Call your lender to see whether this is a possibility and for help setting it up.
What are the advantages of paying off a car loan early?
If you’re wondering if you should pay off your auto loan early, there are a few reasons why you should.
The most apparent reason to consider paying off a loan early is that it reduces the amount of interest you pay. It is vital to remember that this only applies if you pay a simple interest rate rather than a predetermined interest rate. A simple interest rate is determined monthly based on the amount you still owe, which means that if you pay off your loan early, you will not have to pay the interest that would have accumulated throughout the balance of your loan.
A precomputed rate, on the other hand, is decided at the beginning of your contract and stays a fixed number for the duration of your loan, so whether you paid off the loan early or not, you’d likely still be on the hook for that amount. You can use an online calculator to get approximate financing rates and monthly payments.
More money for other expenses
What happens if you pay off your auto loan ahead of schedule? You may be able to free up money in your monthly budget, allowing you to spend it on other bills or requirements. You may even put the extra money aside for a rainy day.
Avoid being “upside-down”
It’s not unusual for someone to owe more on a car than the vehicle is worth. This is what’s known as being “upside-down” on a car loan.
Being underwater on your debt is a potentially dangerous position. If you were in an accident and totaled the car while you’re upside down on your loan, you’d have to pay back the lender the worth of the vehicle plus the negative equity . Paying off your auto loan early may assist to reduce this risk.
Lower debt-to-income ratio
A debt-to-income ratio compares the amount of money you earn in a particular time to the amount of debt you owe. Lowering this ratio may improve your credit, help you get approved for other loans (like a home mortgage), and help you qualify for lower interest rates.
What are the disadvantages of paying off a car loan early?
Some lenders impose penalties for repaying a vehicle loan early. The lender earns money from the monthly interest you pay on your loan. Repaying a debt early normally means you won’t have to pay any further interest, but there may be an early prepayment penalty.
These fees may cost more than the interest you’ll pay throughout the life of the loan. If that’s the case, it makes more sense to keep making your regular monthly payments rather than paying off the debt early. Check your financing documents or talk to your lender to see if there are prepayment penalties.
You may not want to pay off your auto loan early if it would put you in a bind financially. Depleting your savings account or making larger monthly payments than you can afford may help you pay off this particular debt faster, but it could make it difficult to cover surprise expenses later.
Paying off your auto loan early should be pursued only if it does not cause undue hardship to your budget.
Is it smart to pay off car loan early?
Finally, the bottom line. Paying off a vehicle loan early may save you money if the lender does not impose an excessive prepayment penalty and you do not have any other high-interest debt. Even a few more payments may help you save a lot of money.
Does paying off auto loan early hurt credit?
Paying off your auto loan early might have a negative impact on your credit score. When you shut a credit account, your score drops by a few points. So, while it’s normal, if you are on the edge between two categories, waiting to pay off your car loan may be a good idea if you need to maintain your score for other big purchases.
Is it better to pay off car loan early or save?
Paying off your debt sooner means you’ll have more money in your pocket each month after it’s paid off. It also lowers your car insurance payments, so you can use the savings to stash away for a rainy day, pay off other debt or invest.
Can you pay off a 72 month car loan early?
Is it possible to pay off a 72-month auto loan early? You can, in fact, pay off a 72- or 84-month vehicle loan early. Since these are extensive repayment periods, you may save a lot of money by covering the interest over a shorter period of time.
Why does your credit score drop when you pay off a car loan?
Credit usage, or the percentage of your credit limits that you are presently utilizing, is an important aspect in credit ratings. It is one reason your credit score could drop a little after you pay off debt, particularly if you close the account.
Makenzie Berke is Interior Repair Manager at ColorProTech. He writes about technology, answer questions about car topics that people want to know