Can I Pay Off My Car Loan Early?

Paying off a car loan early is certainly possible. Unless you can pay off your remaining balance in one lump sum, you’ll need to make a plan in order to increase the frequency or amount of your payments. But first: is it good to pay off a car loan early? Although there are some factors that you’ll want to consider first, there’s definitely nothing wrong with lowering your interest costs and paying down your loan more quickly.

Is it Good to Pay Off a Car Loan Early?

Even if you know how to pay off a car loan early, you might wonder if that’s really the best choice for your budget. Here’s what you’ll want to keep in mind:

Paying off a car loan early is a good idea when:

• You aren’t worried about other loans with higher interest rates or balances.
• You’d like to focus on saving for other goals or future expenses.
• You already have a savings cushion for emergencies.
• You want to lower your monthly expenses prior to retirement.
• You need to lower your debt to income ratio.

Paying off a car loan early is not a good idea when:

• You don’t have any funds set aside for emergencies.
• You already have a low interest rate on your car loan, and could benefit more by directing your extra funds into a retirement plan or another financial goal.
• You need to raise your credit score, and you’re using your regular, on-time car payments in order to do so.

Although prepayment penalties are not very common anymore, you should review your loan information carefully before you make any final plan!

How to Pay Off a Car Loan Early

So, you’ve made a decision. Now it’s time to learn how to pay off a car loan early! Here are the most common strategies employed by drivers in Houston and Channelview:

• Make Bi-Weekly Payments: If you split your monthly payment in two and make a payment every two weeks, you’ll stay on top of your loan balance and make the equivalent of one additional monthly payment per year.
• Round Up Your Payment Amount: If you have $50 to spare each month, consider adding that money onto your regular car payment. This money will help you pay down the principal more quickly and pay less in interest over time.
• Make One Extra Payment Per Year: If you don’t want to worry about spending more money every month, you can set some money aside and pay it all in one lump sum. One or two extra payments per year can help you get out of a loan several months early.
• Don’t Skip Any Payments: This one seems obvious, but some lenders offer their buyers the opportunity to skip one or two car payments every year. Don’t be tempted! Two missed payments per year over three years will keep you on the hook—with interest—for an extra six months.
• Refinance Your Car Loan: If your situation has changed and your credit has improved, it might be worth it to refinance your loan! Securing a lower interest rate could help you save big, and if you still have money in the bank, you can always put extra money toward the principal each month.

Learn More About Auto Loans with Big Star Buick GMC!

If you’re located near Baytown or Crosby, our team would be happy to assist you with any and all of your auto financing needs. Check out our financing and insurance tips, learn about what gap insurance covers, or talk to our team about refinancing today!