How To Pay Off Your Car Loan Early

As with any large debt, paying if off early may sound daunting, but it may be easier than you think and could be a huge relief to you in the long run – especially as monthly payments get larger, terms get longer and APRs get higher!

However, you may have serious questions about how to quickly remove this large monthly expense from your budget. Let's look into how to pay your car off early.

3 Ways To Pay Off A Car Loan Faster

Curious about how to pay off your car loan faster? Some strategies include making additional payments, canceling add-ons and reducing expenses.

1. Making Additional Payments

Paying extra on an auto loan will help you remove the loan earlier. Here are some ways you can accomplish it:

• Making biweekly payments: Making biweekly payments means that you make payments every 2 weeks. So, for example, if you pay $1,200 per month toward car payments, you'll make two $600 biweekly payments instead. You'll make one extra payment per year using this method.
• Making a second monthly payment: If you have extra pay periods throughout the month, you could take that opportunity to make a second monthly payment toward your car loan.
• Rounding your payment up each month: Consider rounding up each payment to the tens or hundreds. For example, if your payment is $645, you could make a lot more headway if you rounded it up to $700 instead.
• One more extra payment: Or, plan on one large extra payment each year. You can choose the best time of the year to make it happen, such as during a part of the year when you'll get a bonus from work.
• Tax refunds or bonuses: Consider putting full tax refunds or bonuses you earn toward your auto loan.

2. Canceling Add-Ons

Buying a vehicle can include many add-ons that increase the monthly payment. By eliminating add-ons, the monthly payment can become lower and allow for a quicker resolution of the loan. Common add-ons include but are not limited to:

• Service contract: A service contract is a paid plan that helps cover auto repairs after the car's factory warranty expires.
• Extended warranty: Extended warranties are optional add-on products that cover defects or failures not covered by the manufacturer's warranty.
• Paint protection: Paint protection shields the paint of your car from stone chips, tree sap, bird droppings and fading.
• Guaranteed asset protection (GAP) insurance: GAP insurance covers the difference between the amount you owe on your loan and the amount the insurance company pays if your vehicle is stolen or totaled. GAP covers the loss if your loan balance is higher than the vehicle's value.
• Tire and wheel protection: Dealers often use tire and wheel protection to cover tires and rims if damaged.

In certain cases, you can forgo some of these add-ons. It may be worth looking at your auto insurance plan or speaking with a representative, too, to see what’s covered.

3. Reducing Expenses

Reducing various expenses and tracking spending in your day-to-day life can free up additional income, which you can use to pay off an auto loan quicker. For example:

• Cook meals at home instead of dining out
• Move to a dwelling with lower rent
• Avoid expensive vacations or other travel expenses
• Cancel unused subscriptions and memberships

Should You Pay Off Your Car Loan Early?

Before attempting to pay off auto loans early, walk yourself through the steps below to make sure it's the right plan for you.

Step 1: Review Your Finances

First, look over personal budgets and finances, and be mindful of any potential new expenses and/or monetary concerns. This can help you decide if paying a loan off early makes sense.

Step 2: Check With Your Lender About Penalties

Some loan agreements include a prepayment penalty that will incur extra charges in the event of paying off the loan early. Check with your lender or review the terms of your loan to make sure there are no prepayment penalties.

Step 3: Consider Refinancing

If a high interest rate is the main reason for paying off a loan early, refinancing is an option. Refinancing could help you obtain a potentially lower interest rate, better terms and a lower payment. You may qualify for better loan terms as long as your credit score improved before you applied for the loan.

However, if you can't qualify for a lower monthly payment or a sooner payoff date, refinancing might not make sense. You don't want to lengthen your term, because then you'll pay more interest over the life of the loan.

Pros And Cons Of Paying Off A Car Loan Faster

While there can be many benefits to paying a car loan off early, there are also some drawbacks to consider. Check out the pros and cons below:

Pros

• Save money on interest: One of the largest benefits of paying off a car loan faster is that you'll save money on interest, possibly thousands of dollars. You'd also own the car free and clear.
• Lower your debt-to-income ratio (DTI): Paying off a car loan can help lower your DTI. A low DTI allows lenders to assess whether you can afford to repay money you borrow and factors into any of your future loan applications. You can calculate DTI by adding up your monthly bills and dividing that by your monthly income.
• Free up money for the financial future: Paying off a car loan early can free up money for a mortgage or other large expenditures in the future.

Cons

• Lower your credit score: Credit scores are computed based on making consistent payments on long-term debt. Paying a car loan off early could lower your credit score in the short term.
• Paying precomputed interest: Some loans come with the interest precomputed, meaning that paying off the loan early will not allow you to save any money on the interest.
• Lack of disposable income: Paying off a car loan early with extra payments means that there is less money in the budget for other things, such as leisure activities, bills, emergencies, etc.

FAQs About Paying Off A Car Loan Early

Still have questions about paying off a car loan early? Read on for more information.

What happens when I pay off my auto loan?

You'll own your car free and clear after you pay off your loan. Your lienholder will send you an official release of the lien letter, which you must take to your state motor vehicle department. You'll apply for an updated title to put the title in your name, though you can also transfer your title electronically in some situations. Once you pay off your loan, also tell your car insurance company so you can remove the lienholder from your policy.

Can automatic payments help pay off my car loan early?

Some lenders offer a reduced interest rate if you sign up for automatic payments. This reduction in the interest rate represents less money needed to be repaid in the long run, allowing for a potential earlier payoff.

How do I snowball my auto loan in order to pay it off?

Snowballing means tackling your lowest debt amount first. For example, if you have two loans, one worth $1,000 and another worth $2,000, you'd pay off the lower amount first. You pay the minimum on the $2,000 debt and put extra money toward the smallest debt each month. You follow this pattern until you pay off the debt. Snowballing debt can give you a quick win because you'll pay off the smallest debt faster.

The Bottom Line: Paying Off A Car Loan Early Can Be Beneficial

If you think you want to pay off your car loan early, consider whether it makes sense for your situation – look at the pros and cons of paying off your loan. Try to pay it off early if you have a high-interest auto loan and no opportunity to refinance. If you have multiple debts, consider taking action on the smallest debt first.

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