Can I Pay Off My Car Loan Early?
Financing your new or used carmeans you’re locked into a fixed payment each month until the loan is paid off. On average, you can expect the term of an auto loan to be around 48 to 72 months, but Wichita shoppers want to know, “Can I pay off my car loan early?” The short answer is yes, but it also depends on the bank or lender who holds your loan. Keep reading as the finance team at Don Hattan Dealerships explains it all.
Is it Good to Pay Off a Car Loan Early?
Depending on your financial situation, paying off a car loan sooner than expected is hard work. But with the right strategy, your hard work will pay off in the form of lower overall interest to pay plus less risk of the vehicle becoming upside down — meaning you owe more on the loan than the value of the car. So, it’s safe to say, paying off a car loan early is a good idea.
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
When Paying Off a Car Loan Early Isn’t the Best Option
- You don’t have extra funds set aside for emergencies
- If you have an exceptionally good 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 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 methods you can follow to pay off your car loan early. Take a look to determine which route makes the most sense for you:
- Make Bi-Weekly Payments – Check with your lender first to ensure it’s okay to use this payment frequency; divide your monthly car payment by two, then make that payment amount every two weeks. Using this method, you will effectively make 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 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 reduce your monthly payment, making it easier to pay more than what’s required each month so you can pay off your loan early.
Learn More with Don Hattan Dealerships!
So, is it good to pay off a car loan early? For many Andover drivers, the answer is yes! But, if you’d like to learn more about how paying off your car loan earlier than planned can save you money, contact us at Don Hattan Dealerships. We’re always happy to provide car-buying tips for every step of the car-shopping journey.
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