7 Tips For Paying Off Your Car Loan Early
If you’ve been paying a car loan and have a year or more left on the loan, you may be wondering how to pay off your car sooner.
Paying off a car loan early can save you money in interest you’d otherwise be paying.
However, there are also drawbacks to paying off auto loan early, including a possible pre-payment penalty.
In this article, we’ll discuss seven tips for paying off your car loan early.
If you have questions about car loans or personal loans to pay off your car loan sooner, please give us a call today at 866.287.6225 to schedule a no-obligation consultation with one of our auto loan experts.
Benefits Of Paying Off Your Auto Loan Early
The greatest benefit of paying off your auto loan early is savings. The sooner you pay off your car loan, the more money you’ll have each month.
The fastest way to pay off a car loan is to simply pay cash for the remaining balance, but make sure to get a pay-off quote before sending in that payment, because it doesn’t always align perfectly with the amount shown on your statements.
Also, because some lenders charge a pre-payment penalty, be sure to call your lender and ask about any potential fees you may face for early pay-off, and make sure to research your pay-off options as well.
After you read through the options discussed in this article, we suggest you run the numbers to see what works best for your budget.
For example, you can calculate whether you’ll save more in interest by paying off your auto loan early or by making additional incremental payments with each payment issued over the course of the loan to pay it down faster, but avoid having to do it all at once.
The main benefits of paying off an auto loan early are:
Saving on Interest:
When you pay off your car loan early you’ll save money right away simply by no longer having to make a monthly payment that includes the interest that’s added to the loan amount.
Freeing-up Funds For Other Expenses:
Once you pay off your loan you’ll have money in the bank which you can use to pay down or pay off other loans and bills, or deposit in a savings account where you can watch your money grow!
Not Owing More Than Your Car Is Worth:
All cars depreciate in value as soon as they’re sold and driven off the lot. The longer the term of your loan, the more likely it is that the car’s value will at some point depreciated below the balance of the loan. If you plan to keep the car for many years, having “negative equity” isn’t a problem. But if you decide to sell the car, the trade-in value may be less than you owe on the car and you’ll still be responsible for paying off your loan.
Is Paying Off Your Car Early Always Worth It?
Although paying off your car early can save you money, it can also lower your credit score.
The credit bureau, Experian
, explains, “Whenever you make a major change to your credit history—including paying off a loan
—your credit score may drop slightly.”
If you don't have any negative issues in your credit history, this drop should be temporary; your credit scores will rise again in a few months.
Also, keep in mind that after your loan is paid off and the account is closed, your car loan will still remain on your credit report for up to 10 years, and that as long as you always made your payments on time, the loan will continue to have a positive effect on your credit history.
Even though closed accounts still affect your credit score, open positive credit accounts have more of an impact than closed ones.
Some banks, credit unions, and financing companies will charge a prepayment penalty for paying off a car loan early. They do this to make up for the money they’ll lose by not collecting the long-term interest on your loan.
Before you commit to paying off your car loan, be sure you can afford to do so. If you’re already close to the end of the loan and can spare a few hundred or a few thousand dollars to pay it off (and your lender has no prepayment penalty), then it’s worth it to pay off the loan.
If you have high-interest credit card debt or other debts with higher interest rates, then paying of your car loan may not be with it. Since car loans tend to have lower interest rates than credit cards, you’ll likely do better paying off or paying-down your credit cards first.
For car loans with 0% APR, there's really no advantage to paying off your car early. Since you’re not paying any interest, there’s no harm in keeping the loan.
Seven Tips For Paying Off Your Car Loan Early
What’s the best way for paying off your car loan early? Here are a few tips and tricks that you could use to get your loan paid off faster.
- Don't Skip ANY Payments: The fastest way to avoid getting your loan paid off early is to miss or delay a payment, which is likely to lead to problems with potential penalties, fines, or additional fees. If your goal is to get your loan paid off early, this should be step number one in the process.
- Pay Half Your Monthly Payment Every two Weeks: Paying off an auto loan early is sometimes just a matter of getting creative with when you make payments. Always make your scheduled monthly payment, and consider making additional payments biweekly. Paying this way is equivalent to making an extra payment in that month.
- Round Up: Making smaller “rounded-up” payments each month will help you pay off your loan quicker. For example, if you’re loan is $250, consider paying $275 or even $300 once in a while, if you can. These small payments will add up and you’ll be pleasantly surprised by your pay-off progress.
- Make One Large Extra Payment Every Year: Making an additional payment each year can dramatically reduce the length of your loan. Be sure to track your loan balance so you can see the positive impact these extra payments are having.
- Make at Least One Extra Payment Over the Term of the Loan: If you can’t afford to make one large payment each year, consider making at least one large payment at least once during the term of the loan, more often if you can afford it.
- Consider Refinancing Your Loan: Banks and credit unions offer a variety of loan options that could help you pay off your car loan quicker, and at a lower rate. And if you own a home, you could use a Home Equity Line of Credit (HELOC) from CU SoCal to pay off your loan.
- Take Advantage of Unexpected Income: If you’ve received a pay raise, settlement, or other unexpected income, you may want to consider using these funds to pay off your car loan. The fastest way to pay off car loan is always with cash.
Why Savvy Consumers Choose CU SoCal
For over 60 years, the Credit Union of Southern California has been proudly serving Orange County, San Bernardino County, Riverside County, making CU SoCal Southern California's fastest growing credit union.
Apply For A CU SoCal Auto Loan Today!
At CU SoCal, we lend on character, not just on credit scores. If need an auto loan we can help. We listen to your story and look beyond your credit score today to offer the right auto loan that will help you become financially stronger tomorrow.
Please give us a call today at 866.287.6225 to schedule a no-obligation consultation with one of our auto loan experts.