How Does Paying Off a Car Loan Early Work?

Is It Good to Pay Off a Car Loan Early?

It takes good financial planning and a lot of diligence to pay off a car loan early. However, you’ll be rewarded with lower interest paid overall, decreased chances of becoming upside down on your loan, and a lower debt-to-income ratio, and you’ll be one step closer to financial freedom. In terms of paying off a car loan early, you’ll want to take the following factors into account:

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 excellent interest rate, it may be smarter to just 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 in a retirement fund or for a future financial goal, such as a mortgage.
• 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.

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 or growing your family
• You’re looking to improve your debt-to-income ratio

How to Pay Off a Car Loan Early

There are a few ways you can pay off your car loan early. Take a look to determine which route makes the most sense for yourself:

• Make Bi-Weekly Payments – Check with your local Gilbert lender first to ensure it’s okay to use this technique; divide your monthly car payment by two, then make that payment amount every two weeks. Using this method, you will effectively be making 13 full payments per year rather than 12.
• Round Up Your Payment Each Month – Each time you make a monthly payment, round up the amount to the nearest $50.
• Make One Extra Payment Each Year in One Lump Sum – If you’d rather not round up for each monthly payment using the above method, you can instead choose to make one large extra payment per year to achieve the same interest savings.
• Resist the Temptation of Skipping a Payment – Believe it or not, some lenders in the Tempe area allow you to skip one or even two car loan payments per year. This may be tempting if you’re in the midst of 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 what’s required each month, so you can pay off your loan early.

Get Further Financing Assistance from Coulter INFINITI

Is it good to pay off a car loan early? For many drivers, the answer is yes! If you’d like more information on how paying off your car loan earlier than planned can save you money, contact us at Coulter INFINITI!