You have a new(ish) car. You have a substantial monthly payment. You have a bit extra stashed away. Then, you may be wondering what it’d mean for you to pay off a car loan early.
Not only will you likely have better monthly cashflow to apply to other things (Retirement? Your next vacation? Credit cards with high interest rates?) you may also benefit in other ways. So, let’s explore when and how paying off a car loan early can benefit you.
Before jumping into the how's, let’s look at some examples of why paying off your loan ahead of time can benefit you. You can…
As you can see, there are potential benefits to paying off a car loan early — but before you make any changes, consult your lender. Things may not be as straightforward as sending your bank a big check to call it a day. Some loan agreements have early payment penalties which would derail the whole purpose of paying off your loan early.
If paying off early seems like a good idea, it’s time to strategize. The main perk of paying off a loan early may be saving money on interest if you have a simple interest loan.
You may decide that it isn’t worth paying off your auto loan early. You could discover your lender charges a prepayment penalty, you have other higher interest loans or credit cards that are worth paying off first or that paying off the loan early will stretch your finances too thin. Some people, for example, like to keep a “cash cushion” available to weather emergencies, which could be significantly impacted if paying the full balance of a car loan.
In some cases, paying off your loan early could improve your credit, but keeping your loan can build credit too, by making payments on time and building a credit history, among other factors. But if you already have good credit, it may not make a difference.
Once you’ve paid off your car loan and the terms of your contract are satisfied, you should expect the title or release document for the vehicle soon after. Upon receiving the necessary documents, you will need to get the title of your vehicle legally transferred under your name by going to your state’s motor vehicles department.
Once you’ve decided you are going to pay down or pay off your loan early, there are five ways to reach your goal:
Depending on your financial circumstances and the terms of your loan, paying off your car loan early may be a smart move. Or you may find it beneficial to remain on track with your standard payments. Whatever you’re thinking, we recommend checking with your lender to avoid any extra fees or penalties.
