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How to Pay Off a Car Loan Early

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Paying Off a Car Loan Early

If you have a car loan, you know you must make monthly payments on time every month. But what about paying off a car loan early? Is it good to pay off a car loan early? We at Performance Auto Group are here to help. In this guide, our finance team answers your questions and explains how to pay off a car loan early and when it’s a good idea for Whippany, Pompton Plains, and surrounding-area drivers to do so.

 

 

Is it Good to Pay Off a Car Loan Early?

It takes diligence and good financial planning to pay off a car loan early. Still, you’re rewarded with less interest paid, decreased chances of getting into a negative equity situation, an improved credit score, and being one step closer to financial freedom. Still, when answering the question, “Is it good to pay off a car loan early?” you should consider the following factors:

When Paying Off a Car Loan Early Makes Sense

  • You don’t have many other debts to pay off or want to pay off your car loan to free up funds for other expenses or financial goals.
  • You have enough in savings or room in your budget that making larger monthly car payments won’t negatively affect your finances.
  • You want to lower your monthly expenses to work on a more significant financial goal, such as retirement or buying a home.
  • You’re looking to improve your credit score and debt-to-income ratio.

When Paying Off a Car Loan Early Isn’t a Good Idea

  • Suppose you have an exceptionally low interest rate. In that case, it may be wise to continue making on-time payments in the agreed-upon amount because the money you’d use to pay off your loan early could be better used for retirement or another financial goal.
  • You don’t have many extra funds set aside for emergencies.
  • You’re using your on-time, set monthly payments to build your credit history or increase your credit score.
  • Some car loans include prepayment penalties. Check your loan agreement. If you will get penalized for early payment, you should probably not pay off your car early.

Paying Off a Car Loan Early: What to Do

So, let’s say you’ve decided paying off your car early is the best thing. Below are the steps to take, and soon you’ll understand how to pay off a car loan early.

  • Make Bi-Weekly Payments –Check with your Randolph auto lender to see if it’s okay to make bi-weekly payments. If so, divide your monthly car payment by two, then pay that amount every two weeks. By using this method, you will end up making 13 full payments per year instead of 12.
  • Round Up Your Payment Each Month –Each time you make a payment, round up the amount to the nearest $50 or $100.
  • Make One Extra Payment Each Year in a Lump Sum –If you get an annual bonus or are willing to use your tax refund, make one large extra payment per year.
  • Resist the Temptation of Skipping a Payment –Some lenders will ask you if you want to skip one or even two payments during the holidays. As tempting as it is, resist the urge. It will only lengthen your loan term and cost you more in interest.
  • Refinance with a New Car Loan –Once you’ve made regular on-time payments for a year or two, you may be a good candidate for refinancing your loan. But only refinance if you can get a lower interest rate. The lower interest rate will reduce your monthly payments so you can pay more than what’s required and pay off your loan early.

Learn More About Auto Financing with Performance Auto Group!

Now that you know the details of paying off a car loan early, come to Performance Auto Group in Wayne for even more auto loan information. You can use our offline financing application and payment calculator free of charge at your convenience. Don’t hesitate to contact us if we can assist you.

 

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