How To Pay Off Your Car Loan Faster

The first step to paying off your car loan early is figuring out whether it’s a good idea to do so. While getting rid of your car payment seems like a major advantage, it may not always be the best financial decision.

When You Should Consider Paying Off Your Car Loan Early

There are many situations in which it makes sense to pay off your car loan faster than your contract specifies. Here are some of the most common:

  • You got a raise or extra cash: If you recently got a pay raise or a tax refund or otherwise came into extra unexpected money, you may be able to afford making larger payments.
  • You want to be debt-free: When you pay off your car loan, you go from having debt to having an asset. This could increase your credit score in addition to removing a monthly obligation.

Graphic showing seven ways to improve your credit score

  • You have a high interest rate: You may have had to settle for a high-interest loan when you bought your car. Paying off your loan early can substantially reduce the amount of interest you pay over the life of the loan, especially when your rate is high.
  • You want to save money: Paying off your auto loan ahead of time reduces the amount you pay in interest. Depending on how quickly you pay off your loan, the savings could be substantial.
  • You have a variable-rate auto loan: With loan interest rates on their way up, it may be a good idea to pay off your car loan faster to avoid getting hit with a higher rate.
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When You May Not Want To Pay Off Your Car Loan Early

Faster repayment of your auto loan isn’t always the best move. Here are a few situations in which it may not make sense to pay off your car loan faster:

  • Your car loan has prepayment penalties: Some loans come with penalties for early payoff. In this case, you may not save money by repaying ahead of schedule,
  • You can’t really afford it: Stretching to make extra payments on your car loan may seem wise, but if you end up needing to borrow money as a result, it can hurt your financial situation.
  • You have other debts with higher interest rates: In many cases, the interest rate on a car loan is lower than the rates for credit cards, personal loans, student loans and other types of financing. If you have loan debts with higher interest rates, it usually makes more sense to pay those off early.

How To Pay off Car Loan Faster Calculator

Before you try to pay off your car loan early, see if doing it would actually benefit you. The additional savings may not be worth the adjustments you’d need to make to your budget.

One of the easiest ways to find out how much you can save is to use a car loan calculator. These tools allow you to input different scenarios, such as making higher monthly payments, and see how they would affect your loan. You can even see what your payments would be if you refinanced your car loan at a different interest rate.

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