Paying Off Your Car Loan EarlyPublished Tuesday, May 17, 2022
If you are currently financing a car or are planning to take out a car loan soon, here’s a tip you may not realise: you can pay off your loan early if desired.
Paying off auto loans ahead of schedule can provide numerous benefits for your financial situation. While some lenders charge penalties for early repayments, the benefits outweigh the cons in many cases.
Read on to learn the answer to “Can car finance be paid off early?” Then check out our Westside Auto Wholesale financing page to learn more about our car finance options.
Benefits of Paying Off Your Loan Early
Many consumers believe that the repayment schedule they agree to upon signing for a loan is the schedule they must stick to until the end of the loan term. However, if you can come up with the funds to pay off your car loan early, you can potentially receive the following benefits:
Reduce Total Loan Cost
Most auto loans charge interest on top of every monthly payment. In most cases, this interest rate is a percentage of your total principal or the balance you owe on your loan.
Let’s say you have a car loan with a $500 monthly payment. At the beginning of the loan, most of your monthly payment will go toward interest. As you pay down the loan, a larger portion of the $500 will go toward your actual principal, until your final payment pays off the remaining principal.
When you pay off this type of loan early, you can reduce the amount you pay in interest. For example, you can make a $1,000 payment each month instead of a $500 payment, lowering your principal faster.
However, some lenders charge a fixed interest rate, meaning that you’ll pay the same amount in interest no matter how quickly you pay down your loan. Be sure to check your exact lending terms to understand the interest-related benefits of paying off your loan early.
Streamline New Car Purchase
If you currently owe money on a car loan but would like to purchase a new vehicle, paying off your car loan early can allow you to secure your new car faster.
While many auto lenders allow you to roll over an existing auto loan into a new one after trading in your vehicle, doing so is not always wise. The new car will probably cost more than your old one, increasing your monthly loan payments. You also may not be able to secure the same interest rate, leading you to pay more in interest.
However, paying off your existing loan early can allow you to have a clean slate when purchasing a new car. Your lender can also review your payment activity as evidence of your reliability, which may lead you to secure a lower interest rate.
Gain Peace of Mind and Financial Freedom
Sometimes, having too many loan payments on your plate each month can feel stressful. You may struggle to manage your monthly payments and remember to make them on time. You may also feel burdened under a pile of debt.
However, paying off your car loan early can give you peace of mind and leave you one step closer to financial freedom.
Dedicate More Funds to Other Loans
If you currently owe money on several loans, paying off one of them can allow you to dedicate more to other loans. Financial experts often recommend two methods of debt repayment: debt snowball and debt avalanche.
Debt avalanche is the process of paying off high-interest debt first. Meanwhile, debt snowball is the process of paying off your smallest debt first.
If your car loan matches either of these qualifiers, it may make sense to pay it off early. Then, you’ll be able to dedicate more of your savings to other loans moving forward.
Own Your Car Outright
Finally, paying off your loan early can allow you to own your car outright. You’ll no longer be in debt to your dealership or the lender. Instead, you’ll be able to have full control over your vehicle.
Drawbacks of Paying Off Your Loan Early
While paying off your car loan early offers numerous benefits, it may also come with a few drawbacks. Here are a few potential downsides of paying off a car loan early.
Face Lender Penalties
Some lenders charge an early exit fee if you pay off your loan ahead of schedule. Typically, this fee exists because paying off your loan early reduces the total amount you pay in interest, and lenders want to secure some sort of compensation in its place.
However, other lenders do not charge any prepayment fees or penalties. Be sure to check with your lender and review your specific loan terms before paying off a loan early. In many cases, the repayment penalty may still be less than what you would owe in interest if you did not repay the loan ahead of schedule.
Paying off your loan early will require you to make larger monthly payments or pay the total principal out of your savings account. This may not be a big deal if you have a lot of excess money in savings. However, if you’re struggling to make ends meet, paying off your loan ahead of time may force you into financial hardship.
Financial experts typically only recommend paying off loan balance early when you have adequate savings in an emergency fund and can pay for all monthly expenses.
How To Pay Off a Car Loan Early
You can pay off your car loan early by making additional monthly payments or providing a lump-sum payment to your lender.
Additional Monthly Payments
If you do not have enough money to pay off your remaining loan balance in one go, the easiest way to repay your loan early is to increase your monthly payments.
We recommend closely examining your income and monthly expenses to determine how much room you have in your budget. Even increasing your payments by $50 each month can allow you to save money in interest and repay your loan faster.
Alternatively, you can consider making an additional payment or two each month when you have the extra money. Every extra payment you make brings you one step closer to owning your car outright.
Alternatively, you can pay off your entire remaining balance in one payment. This method can allow you to save the most money in interest and achieve the benefits above faster.
Of course, you’ll want to make sure you’re in a suitable financial position to make a sizable payment now. You should also consider whether you could use that money more strategically, such as to pay off a higher-interest loan or to set aside an emergency fund.
Other ways to Save Money with a Car Loan
Paying off a car loan early isn’t doable for everyone. If you’re like many people, you may have chosen loan terms that are already at the top of your budget.
However, you can take other steps to save money with a car loan. Here are a few ways to reduce your overall loan costs:
- Review several offers: Before agreeing to a loan offer, be sure to consider a few options to identify the most affordable loan. At Westside Auto Wholesale, we work with several financing sources, allowing you to choose a loan option that suits your needs and budget.
- Stick to a short repayment schedule: If you can, choose a financing option with a short loan term. You’ll pay less money in interest when you repay your loan within one or two years rather than six or seven.
- Look for flexible payments: Finally, we recommend working with a lender that allows for flexible payments. These lenders allow you to make additional loan payments when you have extra funds, enabling you to pay down your principal faster.
Contact our team at Westside Auto Wholesale today to learn more about our car financing options and discover the benefits of paying off your auto loan early.