Should I Pay Off My Car Loan Early?
Can you pay off a car loan early? What are the disadvantages of paying off a car loan early? Is it easy to pay off a car loan early? If you’ve ever asked yourself any of these questions, you’ve come to the right place. Before you decide whether paying off your car loan early is the right decision, you need to weigh all of the pros and cons. We take a look at the obvious benefits, the things you need to consider first, and how you might want to go about it.
What could you do with an extra few hundred dollars per month? If you have a car loan, it’s a good question to ask. Because if you find yourself in a position to consider paying off your car loan early, you might just end up having a few hundred extra dollars each month to spend on other things.
And while paying off a car loan early is easier said than done, it’s far from impossible.
But is it always a good idea?
Can I pay off my car loan early?
The simple answer is yes, you can pay off your car loan early. Maybe you came into a large sum of money and want to put that towards an early settlement of your car loan in a big lump sum. Or maybe you got a raise at work and can afford to make extra payments going forward. In either scenario, there’s nothing stopping you from paying your car loan faster.
Should I pay off my car loan early?
Of course, life is rarely simple. Just because you can pay off your car loan early, does that mean you should? The answer to that question depends on your unique financial situation, such as whether you have other debts you need to pay off as well, or whether you can actually afford to increase your monthly car payments in the first place.
Of course, there are obvious benefits of paying off your car loan early. If you’re leaning toward an early settlement of your car loan or making a big lump sum payment to pay off your car debt faster, you’ll:
- Save on interest over the full term of your loan.
- Remove a monthly payment from your expenses.
But there are also some surprising disadvantages of paying off your car loan debt early...
3 reasons to NOT pay off your car loan early
Sure, it’s beneficial to pay off your car loan early — but only if it makes sense for your unique financial situation. Here’s a quick look at some reasons why you might want to keep your car loan and continue to pay the monthly minimum payments.
1. You might want to build your credit rating
Paying off your car loan early won’t negatively impact your credit rating at all. But if you want to build your credit, it can be beneficial to hang on to your car loan and make the monthly payments instead. On-time regular payments will positively contribute to your credit rating more than a single lump-sum payment, or paying your loan off faster.
2. You might have higher interest debt to pay off
Chances are, your car loan isn’t the only debt you have. You might have a mortgage, credit card debt, student loans, and a line of credit, or all of the above. If you’re in a position to consider paying off your car loan early, you should consider which if your debts have the highest interest rate.
If you managed to secure a low APR on your car loan (such as 0% financing), you might not want to pay that debt off first. It’s wise to compare the interest on your various loans and pay down high-interest debt first, as this will save you the most money in interest over the long term.
3. You might be hit with a payoff penalty
Before you make your decision, review the terms of your car loan contract. It’s rare, but some lenders will charge a payoff penalty if you decide to leave the contract by paying off your loan amount early. If this is the case for your car loan, you’ll simply need to assess whether the penalty is less or more than the money you’ll save on interest for the remainder of your original car loan term.
How to pay off your car loan early
When it comes to paying off your car loan early, you have a few options. You can pay an additional amount each month along with your normal monthly payments. You can also make a big lump sum payment or several big lump sum payments.
If you are in a stronger financial position than when you first bought the car and your credit score has improved, refinancing can also help you pay off your debt faster if you can get a shorter term with increased payments and even a better interest rate.
You might also want to consider simply downsizing your vehicle to a more cost-efficient option. This will lower your overall car loan amount and decrease your monthly payments.
Before you make any decision though, make sure you check with your lender and ask about any penalties for paying your loan off early.
To learn more about these options, make sure to check out our “3 Ways to Pay Off Your Car Loan Faster” blog post.
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