Can I Pay Off My Car Loan Early?

Woman Signing Paperwork

 

Whether you finance a new vehicle or a used car, your loan will have a set amount which you are required to pay each month. But what if you’d like to pay more than your monthly payment amount? Can you pay off a car loan early? Yes, paying off a car loan early is an option. Is it good to pay off a car loan early? It depends on your financial situation and the terms of your loan. In this guide from the finance team at Sam Leman Automotive Group, we’ll take a closer look at what paying off a car loan entails so you can make the decision that’s right for your lifestyle and budget.

Is it Good to Pay Off a Car Loan Early?

By paying off a car loan early you will be rewarded with lower interest paid overall, while decreasing the chances of becoming upside down on your loan. Before you decide to pay off your car loan early, take the following into consideration:

When Paying Off a Car Loan Early Makes Sense

  • If you have little or no other debts to take care of
  • If you have enough extra funds saved up or enough room in your budget so that making larger monthly car payments won’t have a negative effect on your finances
  • If you want to lower your monthly expenses to plan for a larger financial goal, such as entering retirement or growing your family
  • If you’re looking to improve your debt-to-income ratio

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

  • If you are dealing with an already tight budget, paying more on your monthly payments can make a difficult situation worse
  • If the interest rate on your loan is favorable, it may be a better choice to just continue making on-time payments in the agreed upon monthly amount
  • If you’re trying to build your credit history or raise your credit score, continuing to pay your set monthly amount on time will help
  • If your car loan agreement includes prepayment penalties you will want to avoid those penalties by adhering to your regularly scheduled payment amount

How to Pay Off a Car Loan Early

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

  • Make Bi-Weekly Payments – Confirm with your lender first to ensure it’s okay to use this method; then divide your monthly car payment by two and make that payment amount every two weeks. 
  • 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 – Some lenders will allow you to skip one or even two car loan payments per year. While this may be tempting, 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 may want to consider refinancing your car loan to secure a lower interest rate. This will lower your monthly payment and make it easier to pay off your loan early.

Learn More From the Finance Experts at Sam Leman Automotive Group!

Is it good to pay off a car loan early? For many Central Illinois drivers, the answer is yes! If you’d like more information on how to pay off your car loan early, or if you have any other questions about the auto finance options available at Sam Leman Automotive Group, please feel free to contact us. Our team of professionals are standing by to help you secure the loan or lease that is the right fit for your budget today!

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