Can I Pay Off My Car Loan Early?
Schaumburg drivers who choose to finance their new or used car with an auto loan will have a set monthly payment amount that they must adhere to in order to pay it off in time. 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 a viable option for many Streamwood individuals.
In this guide, the finance team at Biggers Chevrolet covers the following topics:
- Does paying off a car loan early avoid interest?
- When paying off a car loan early is or isn’t a good idea.
- How to pay off a car loan early.
Get help determining whether you should start working toward the goal of early car loan payoff and explore some tips to help you get there, below!
Does Paying Off a Car Loan Early Avoid Interest?
Paying off a car loan early can award you many benefits. Chief among them: saving money on interest. Keep in mind, the answer to “Does paying off a car loan early avoid interest?” is not that it helps you outright avoid interest, but that it can lower the total interest paid by a significant amount. As your car loan balance decreases each month, the amount of interest you pay decreases a bit, too.
For example, paying an extra $50 per month on a $15,000 five-year car loan with a 7% interest rate could save you a total of $487 in total interest paid.
Is it Good to Pay Off a Car Loan Early?
It takes good financial planning and a lot of diligence to pay off a car loan early, but you’ll be rewarded with lower interest paid overall, decreased chances of becoming upside down on your loan, a lower debt-to-income ratio, and you’ll be one step closer to financial freedom.
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 much 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 used if you set it aside in a retirement fund or for a future financial goal.
- You’re using your on-time, set monthly payments to build your credit or raise your credit score.
- Some car loan agreements include prepayment penalties. If this is the case, you would of course 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 yourself:
- Make Bi-Weekly Payments – Check with your lender first to ensure it’s okay to use this technique; divide your monthly car payment by two, then make that payment amount every two weeks. Using this method, you will effectively be making 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 lower 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 Biggers Chevrolet!
Is it good to pay off a car loan early? For many Bartlett drivers, the answer is yes! If you’d like more information on how paying off your car loan earlier than planned can save you money, contact us at Biggers Chevrolet. We’re always happy to provide car buying tips like how to calculate auto loan interest and more that you can trust!
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