Can I Pay Off My Car Loan Early?
Some eager Camden drivers who want to get rid of their monthly payments and have disposable income or savings to rely on wonder “can I pay off my car loan early?”. Sure you can! As is the case with other types of loans, like mortgages, you’ll almost never be penalized for choosing to pay off your outstanding balance early. But is it a good idea to pay off a car loan early? When pondering that question, our finance team has two important additional questions to consider:
- Do you have the financial means to comfortably pay off your car loan early?
- If you use money set aside to pay your car loan off early, how else could you make that money work for you (stocks, bonds, high-yield savings accounts, CDs, real estate investments, etc.)? Sometimes, it’s better to carry manageable debt so you can let other money grow over time via compound interest.
Still interested in learning more about how to pay off a car loan early? Not to worry; Southern Chrysler Dodge Jeep Ram has that covered below!
Is it Good to Pay Off a Car Loan Early?
Good financial planning is key to being able to pay off a car loan early, especially if you’re not paying it off in one lump sum, but rather, committing to increase your monthly payments. If you do have wiggle room in your monthly budget to pay off more than the minimum monthly payment, you’ll be rewarded by paying less overall interest, decrease your chances of going “underwater” or “upside-down” on your loan, and lower your debt-to-income ratio. These are all very good things! That said, here’s when paying off a loan early does vs. doesn’t make sense.
When Paying Off a Car Loan Early Makes Good Financial Sense
- You have little to no other debt. You want to free up money every month for other things.
- You have enough money saved, or enough budgetary freedom every month that paying off your loan early, either as a lump sum, or additional money paid monthly won’t place you under undue financial hardship.
- You are attempting to lower your monthly expenses to plan for an overarching financial goal, like retiring or growing your family.
- You want to improve your debt-to-income ratio.
When Paying Off a Car Loan Early Probably Isn’t a Good Idea for You
- You don’t have enough money. If you don’t have an emergency fund to cover 6-12 months of expenses, working on putting money aside into one first is probably a better idea.
- How’s your interest rate? If it’s very low, it may be a better idea to float your money elsewhere or save for a goal, like retirement.
- Are you building your credit score? If so, paying off your loan early is very likely unwise. Why? Because paying regular monthly payments helps establish to lenders that you’re a good financial risk.
- Some car loan agreements do include prepayment penalties. In this case, these fees may wipe out or mitigate any savings associated with paying off your loan early.
How to Pay Off a Car Loan Early
Here’s a handy guide to help you figure out your options if you decide that paying of your car loan early is for you:
- Make Bi-Weekly Payments – Make sure this method is ok with your loan provider/lender. If so, all you need to do is divide your monthly car payment by two, then pay that amount every two weeks. By doing this, you’ll make 13 payments a year instead of 12.
- Round Up Your Payment Each Month – Pay $50 more than the minimum payment each month. It’s easy to pay a little bit more on your car loan if you forgo one or two nights out in Sheridan or Pinebluff.
- Make One Extra Payment Each Year in One Lump Sum – If paying more every month seems unfeasible but you have savings you can use, perhaps paying off some or all of the loan in a lump sum payment is for you.
- Resist the Temptation of Skipping a Payment – Some auto lenders offer forgiveness for a certain amount of payments per year, or in a row. But it’s best to resist the temptation to not pay, whenever possible.
- Refinance with a New Car Loan – Have you already made one or two years’ worth of on-time, in-full payments? You could be a good candidate for auto loan refinancing. Of course, it probably goes without saying that this option only makes sense if you wind up with a lower interest rate after refinancing.
Southern Chrysler Dodge Jeep Ram: Here to Help with All Your Financing Needs
Ready to start making smarter financial decisions? The Southern Chrysler Dodge Jeep Ram finance center wants to help you! Contact us for additional information or check out our additional car buying tips.
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