Can I Pay Off My Car Loan Early?

Around 80% of car buyers in America get an auto loan to help purchase a new or used car. The benefit is that they have the freedom to drive a car while having a set monthly payment amount to keep paying over a certain period of time to pay off the loan in full.

But what if you’d like to pay more than your monthly payment amount? Can you pay off a car loan early? Read on to learn more!

In this guide, our finance team will cover:

• When paying off a car loan early is or isn’t a good idea
• How to pay off a car loan early

Is it Good to Pay Off a Car Loan Early?

Yes! Paying off a car loan early is a viable option for many Garland individuals. It takes good financial planning and a lot of diligence to pay off a car loan early. The benefits of this include:

• Lower overall interest paid
• Decreased chances of becoming upside down on your loan
• Lower debt-to-income ratio
• Being one step closer to financial freedom
• And, possibly, a better credit score

When Paying Off a Car Loan Early Makes Sense

• You have little or no other debts to take care of and would like to get your car loan paid off so you can free up money for other expenses
• You have enough extra funds saved up or enough wiggle room in your budget that making larger monthly car payments won’t affect your emergency funds and other finances
• You are attempting to lower your monthly expenses to plan for a larger financial goal, such as entering retirement, buying a house, or growing your family
• You’re looking to improve your debt-to-income ratio

When Paying Off a Car Loan Early Isn’t the Best Option

• You don’t have many extra funds set aside for emergencies
• If you have an exceptionally good interest rate, it may be smarter just to continue making on-time payments in the agreed-upon monthly amount. The money you’d use to pay your loan off early could be better served if you set it aside for other things
• You’re using your on-time, set monthly payments to build your credit history or raise your credit score
• Some car loan agreements include prepayment penalties. If this is the case, you would, of course, want to avoid those penalties by adhering to your regularly scheduled payment amount.

How to Pay Off a Car Loan Early

Take a look at some strategies for paying off a car loan early:

• Make Bi-Weekly Payments –Check with your lender first to ensure it’s okay to do this. Divide your monthly car payment by two, then make that payment amount every two weeks. Using this method, you will effectively make 24 full payments per year rather than 12. Even if you do this for six months, you can make 18 payments instead of 12. Make sure you designate the extra amounts to go towards the principal of the loan and not the interest.
• Round Up Your Payment Each Month –Each time you make a monthly payment, round up the amount to the nearest $50. Again, make the extra $50 go towards the principal.
• Make One Extra Payment Each Year in One Lump Sum –Choose to make one large extra payment per year. Rather than $50 a month, make the payment $600 a year. You would still see some interest savings.
• Resist the Temptation of Skipping a Payment –Believe it or not, some lenders allow you to skip one or even two car loan payments per year. This may be tempting if you’re in a rough month financially, but it will only lengthen your loan term and tack on more interest.
• Refinance with a New Car Loan –Once you’ve made one or two years’ worth of on-time, in-full payments, you might be a good candidate for refinancing. Of course, you should only refinance if it’s securing you a lower interest rate. The lower interest rate will lower your monthly payment, making it easier to pay more than required monthly. However, it might extend your loan for a longer period.

Learn More with Rusty Wallis Honda!

Is it good to pay off a car loan early? For many Mesquite and Richardson drivers, the answer is yes! Contact us or call (888) 892-3694 if you have additional questions. While here, look over our car-buying tips to shop for a new or used vehicle in Dallas like a pro!