Pros and Cons of Paying Your Car Off Early
If you have the option of paying your car loan off early, it could save you money on interest—but watch out for downsides like prepayment penalties.
Written by Amber Reed
Reviewed by Jessica Barrett
Paying off your
car loan
early can be a great way to eliminate your monthly payments and reduce how much money you spend on interest. But first, be sure to check your loan contract for stipulations like prepayment penalties.If monthly loan payments stress you out, you might consider paying off your auto loan early. If you have some extra money in your savings account and don’t have a lot of other loans with interest debt, then paying your car off early comes with a lot of advantages. But your financial goals and the amount of money you owe are just a few of the things you should consider before making this important financial decision.
Need a little help deciding whether or not to pay your car loan off early? In this guide from
Jerry
, the trustworthy insurance comparison app
that answers all your car-related questions, we’ll go over the pros and cons of paying your car off before the end of your loan term—plus some different ways you can make early payments.Find out if you can reduce your monthly car payments in minutes
* checking your rate won’t affect your credit score
Check your rate
* checking your rate won’t affect your credit score
When should you pay a car loan early?
Paying off your car loan early is a major financial decision that can come with a lot of advantages—but that doesn’t mean it’s a good idea for everyone. Here are a few cases where paying off your auto loan early makes the most financial sense:
- You don’t have other high-interest rate loans, such as personal loans or student loans
- You can make a large payment without causing financial hardship
- You are debt-averse and want to eliminate your monthly car payment
If you feel like any of the above statements describe you, then you’re probably in a good position to think about paying your car off early. But ultimately, the decision comes down to your budget and financial objectives.
Pros and cons of paying a car loan early
The most important thing to consider before paying off your car loan early is how it affects your finances. In most cases, paying a car loan early puts you in a better financial position since you’ll have less debt and lower monthly expenses. But there are some downsides you should consider, too.
Here are some pros and cons of paying your car off early.
Pro: saves you money on interest payments
Whenever you make a car payment, the money is divided between your loan’s principal (the original amount you borrowed) and its interest rate (the cost of borrowing money from your lender). Paying your loan off early or making extra payments toward your principal reduces the total amount of loan interest you have to pay.
MORE: How to calculate total interest paid on a car loan
Pro: lowers your risk of an upside-down loan
If the term of your loan is very long or you have a very high interest rate, the amount you owe on your auto loan could add up to more than your car is worth, leaving you with an upside-down car loan. This high-risk situation can lead to major financial problems—especially if you total your car in an accident.
A vehicle with negative equity means that you’re on the hook for the value of the car plus your loan’s leftover balance. Paying off your car loan early reduces the risk of an upside-down car loan.
Pro: improves your debt-to-income ratio
Your debt-to-income (DTI) ratio is the amount of money you owe compared to the amount of money you make. Paying off your car loan early can help lower your debt-to-income ratio. This can increase your credit score, improve your credit history, and make you more likely to qualify for other loans, such as a home mortgage.
Con: prepayment penalties
Because lenders make money off the amount of interest you pay on your loan, some of them include prepayment penalties in their contracts. If your loan has a prepayment penalty, you’ll need to compare those costs to the amount of interest left on your loan.
If your loan’s prepayment fees add up to more than your interest rate, it makes more financial sense to keep paying your monthly loan payment until the end of your repayment term. If you’re not sure whether your loan includes a prepayment penalty, call your lender or check your loan disclosure documents.
Con: might not fit your budget
While paying off your auto loan could be appealing if you’re uncomfortable with debt, it’s not a good idea if it doesn’t fit your budget. If you don’t have extra cash in your savings account or you have to dip into your emergency fund, then you’re better off making monthly payments until you improve your financial situation.
How to pay a car loan early
If you’ve analyzed your budget and decided that the benefits of paying early outweigh the drawbacks, the next step is to decide how you want to pay your car loan. Here are three ways that ensure your loan amount is paid off well before the end of your loan term.
Make a lump sum payment
As long as it’s within your budget, the easiest way to pay your auto loan off early is by paying off the remaining balance as one lump sum. You’ll have to contact your lender and ask for a pay-off amount, first—but once your lender gives you a quote, you can pay online or send your lender a check through the mail to reduce your car loan balance to zero.
Pay a bit extra each month
If you can’t afford to pay off your car loan all at once, there are still ways to pay it off faster. One method is to decide how much extra you can afford each month, and increase your monthly payment by that amount. For example, if your car payment is $325 per month but your finances allow you to pay $500 a month, you can increase your monthly payment by $175 to reduce the amount of time it takes to pay off your loan—and lower the overall amount of interest you pay.
Make biweekly payments instead of monthly
If you’re on a tight budget but still want to pay your auto loan off early, you could choose to make two payments per month instead of one. By paying half your monthly payment every two weeks, you’ll pay the equivalent of an extra payment over the course of the year. This can slightly reduce how long it takes to pay off your car loan.
You can also choose to pay your regular monthly payment on the day it's due and an additional amount at whatever point during the month is most convenient for you.
Key Takeaway You can pay your auto loan off early by making a lump sum payment, increasing your monthly payment, or making extra payments each month.
How to refinance to get better auto loan terms
Car expenses—ugh, right? Maintaining your vehicle can be pricey (to say the least)! Thankfully, the
car insurance
and auto refinancing super app Jerry
is here to help you keep more money in your pocket. We know you’re busy, so we’ve made it simple! It only takes two minutes to sign up and start browsing the best car insurance rates available from some of the country’s top providers. And if you’re thinking of refinancing your auto loan, the whole process—from sign-up to signing on the dotted line—only takes about 10 minutes!
“I can’t thank theJerryapp enough! They saved me $160 a month, and I didn’t even have to talk over the phone. They took care of everything through text.” —Travis Y.
Find out if you can reduce your monthly car payments in minutes
* checking your rate won’t affect your credit score
Check your rate
* checking your rate won’t affect your credit score
Is it smart to pay off your car loan quickly?
Paying off your car loan quickly is a great way to lower your monthly expenses and reduce the amount of interest you’ll have to pay. But before paying off your car loan, make sure it works with your budget and that your loan terms don’t include high prepayment penalties.
How will I save on car insurance if I pay my car loan off faster?
Paying off your car doesn’t automatically reduce your car insurance rates, but it could save you money by changing what coverages you need. For example,
gap insurance
isn’t necessary once your car is paid off. Removing extra coverages could lead to a lower monthly payment.Reduce your monthly car payments in minutes?
Find out if Jerry can reduce your payments by an average of $150/month
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