Can I Pay Off My Car Loan Early?

Tiny car with coins and finance paperwork

If you’ve financed your new or used car with an auto loan, then you have a set monthly bill you’ve agreed to pay. In order to take ownership of your vehicle on time, you must stick to paying this amount. But what if you’d like to pay more each month? Is it good to pay off a car loan early? Yes, in many cases, paying off a car loan early brings tremendous benefits. Our finance team is here to help you learn how to pay off a car loan early, when it makes the most sense to do so, and more! We’re here to guide you through this exciting process, read on below for more information.

Is it Good to Pay Off a Car Loan Early?

Is it good to pay off a car loan early? The answer is almost always yes! In order to effectively take on paying off a car loan early, you must plan ahead and remain diligent in your financial commitments. However, your prudence will be rewarded with lower interest paid overall, diminished chances of becoming upside down on a loan, a lower debt-to-income ratio, and greater financial liberty. Let’s discuss when it makes sense to pay off a car loan ahead of schedule, and when it’s better to stick to your regular payments:

When Paying Off a Car Loan Early Makes Sense

  • You have few debts, and paying off your car loan would free up extra money for other expenses.
  • You have a sufficient ‘rainy-day fund’ for emergencies, or your budget has enough wiggle room that extra payments won’t impact your other finances.
  • You’re looking to lower your monthly expenses to get ready for a larger goal, such as retirement or growing your New Haven family.
  • You’re on a mission to improve your debt-to-income ratio.

When Paying Off a Car Loan Early Isn’t the Best Option

  • You have limited funds available for emergencies.
  • If your interest rate is exceptionally fair, it may be more beneficial to put the funds for extra payments towards retirement or savings.
  • You’re using your responsible payment history to raise your credit score.
  • Some car loans include prepayment penalties. If this is in the fine print of your loan, avoiding those penalties is the way to go.

How to Pay Off a Car Loan Early

You can employ a variety of methods to pay off your car loan early. Take a look at the following suggestions to determine which route makes the most sense for paying off your Fairfield vehicle:

  • Make Bi-Weekly Payments – Double check with your lender to ensure that this technique is allowed. Divide your monthly car payment by two, then pay that amount every two weeks. With this method, you’ll end up making 13 full payments over the course of the year rather than 12.
  • Round Up Your Payment Each Month – Add some extra funds to each payment by rounding up to the nearest $50.
  • Make One Extra Payment Each Year in One Lump Sum – If you prefer to keep things simple and avoid rounding up and making extra payments each month, simply make a large payment once a year.
  • Resist the Temptation of Skipping a Payment – Surprisingly, some lenders allow for a missed payment or two without a penalty. While it can be tempting to use this flexibility during tough financial times, it will only extend the duration of your loan and lead to greater interest paid overall.
  • Refinance with a New Car Loan – After a year or two of responsible payments, you may be a strong candidate for refinancing. Only take this on if you can secure a better rate. A lower interest rate will lower your payments, making paying off the loan more attainable.

Learn More with Acura of Milford!

Now that you know how to pay off a car loan early, you can take great strides towards greater financial stability. Our Milford team is here to help you with all of your automotive and financial needs. We’re just a short drive from Bridgeport, so reliable car care is down the road. If you have any lingering questions, contact us today to learn more about paying off a car loan early!

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