How to Pay Off a Car Loan Early
Paying off a car loan early can save you hundreds or even thousands of dollars.
There are several advantages to paying off a car loan early—mainly, it’ll give you more money in your pocket each month because you’ll no longer have loan payments.
But there are also potential disadvantages to paying off your loan early as well, such as a possible prepayment penalty or other issues. In this article we’ll discuss the pros and cons of paying off a 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 Car Loan Early
You may be wondering, “Should I pay off my car loan early?” If you have the financial means to pay off your loan in full, and will not be emptying your bank account to do so, then it’s highly recommended to do so.
The main benefits of paying off a car loan early:
- Save on Interest: All loan payments include interest on the original loan amount, this is your APR or Annual Percentage Rate that you agreed to as part of the loan terms. When you pay off your entire loan early you’ll save money that you would’ve otherwise paid in interest over the course of the loan.
- Free-up Funds for Other Expenses: When you no longer have to pay a car loan you’ll have the money that you would’ve spent on monthly payments. You can use your new-found funds to pay for other expenses, pay-down debt, or deposit it into a savings account. Imagine saving a couple of hundred dollars a month!
- Avoid Owing More than Your Car Is Worth: All cars depreciate in value the moment they’re sold. If you buy a car with no money down or a longer loan term, the amount you owe on the car could soon be greater than the value of the car. This is called being “upside-down or underwater” on the loan. Why is this a problem? According to Nerdwallet.com if you’re in an accident in which the car is totaled or you need to sell the car, the money you get won’t be enough to pay off the loan and you could end up owing the lender the remaining loan amount.
When to Not Pay Off Your Car Loan Early
There are also some disadvantages of paying off a car loan early. If one or more of these applies to your situation, then it’s a good idea to postpone paying off your car loan early:
- Prepayment Penalties: Before you make the move to pay off your car loan, check with the bank, credit union, or finance company that holds your loan and ask if there’s a prepayment penalty for doing so. If your lender charges a pre-payment penalty, ask what the penalty amount is, then do the math and see which will cost you less in the long run — the penalty fee or the total remaining months (or years) of payments you owe.
- You Have Other Debt: If paying off your car loan early will cause you to not be able to pay your other bills or debt, then you should definitely wait. Never risk damaging your credit by missing any loan payments, nor should you pay one loan instead of another.
- Effect on Credit Score: Paying off your car loan early could result in a small drop in your credit score, according to the credit bureau Experian. If you don't have any negative issues in your credit history, this drop should be temporary and your credit scores will rise again in a few months.
- Stretching Your Budget: If you want to pay off your loan early, but you can just barely afford to do it, then you may want to think twice before proceeding. While it’s a great idea to get rid of your loan as quickly as possible to avoid interest payments, you don’t want to put yourself in the position of not being able to afford other essentials.
How to Pay Off Your Car Loan Early
The fastest and easiest way to pay off a car loan is to make a lump sum payment for the remaining balance of your loan. If you need a little more time to pay off the loan, but still want to pay it off sooner than the full term of the loan, there are several strategies for paying off a car loan early, including:
- Refinance to a lower rate and shorter loan term. Talk to a credit union, bank, or financing company loan representative about refinance rates and terms. Refinancing to a lower rate can save you money each month.
- Making more frequent payments, such as biweekly instead of monthly. Switching from a once monthly payment to making two or more payments each month is one of the quickest way to pay off car loan.
- Adding more money to your payments each month will help you pay off your car early.
- Paying a little extra each month toward the loan amount. Adding more money to your payments each month will help you pay off your car early.
What happens when you pay off your car loan early? If you plan ahead and plan well, the result of paying off your car loan early is more money in your pocket each month!
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.
Please give us a call today at 866.287.6225 to schedule a no-obligation consultation with one of our auto loan experts.