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- When to consider paying off your car loan early
- The pros of paying off your car loan early
- The cons of paying off your car loan early
- How to pay off your car loan early
- FAQs about paying off a car loan
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It may seem like the optimal situation to pay off your car loan before its term ends, but you have to be mindful of prepayment penalties and any impact it could have on your credit score.
You might have gotten a raise at work, or came into a large amount of money recently, and want to just get it over with and pay your loan back.
But depending on some personal factors, like your current interest rate and monthly payment amount, you may want to reconsider whether paying back your loan early is right for you.
To help you make the decision that’s right for you, the car insurance comparison and broker app Jerry breaks down the pros and cons of paying off a car loan early.
When to consider paying off your car loan early
Before jumping in headfirst and committing to paying off your loan early, you should decide whether it’s truly the right financial decision.
You should consider paying off your loan early if you believe the following apply to you:
- You can comfortably afford to pay off the loan without causing yourself too much financial stress.
- You don’t have other outstanding loans or debts. Other loans, such as a personal loan or credit card, may have higher interest rates—meaning you should probably deal with them first.
- You’re trying to save up for an even larger purchase, such as a home. Boosting the cash you have available and lowering your debt-to-income ratio by paying off your loan early can be particularly helpful.
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The pros of paying off your car loan early
If you’ve decided that paying off your loan early suits your financial situation, there are multiple benefits you can reap:
- Completing your loan payments early will free up your monthly spending. It will also help lower how much total interest you’ll pay over the life of the loan.
- You’ll officially take ownership of the car from your lender.
- Your debt-to-income (DTI) ratio will improve. This ratio measures how much monthly debt you have as a fraction of your monthly income. The lower your DTI, the better you look to future lenders and creditors.
The cons of paying off your car loan early
While there are several advantages to paying your car loan off early, there are some downsides to keep in mind as well:
- Your loan contract might have prepayment penalties, meaning you could face a substantial fee for paying ahead of schedule. Check your loan contract to see if you have a prepayment penalty in place—if so, it may not be worth it.
- Paying off your loan early might not be the best use of your money. If you have other current loans with a higher interest rate or shorter loan term, consider prioritizing paying them off first.
- Your credit score may drop. Whenever you pay off a debt, your credit mix is lowered, which may cause a dip in your credit score.
Pro Tip Prepayment penalties might sneak into your contract without you noticing. Ambiguous terms like the “rule of 78s,” “percentage penalties,” or “precomputed loans” can indicate you’ll have to pay extra for paying off your loan early.
How to pay off your car loan early
If you do decide to go ahead with paying off your loan early, you have a few ways to go about it.
- You can pay off the full amount of your loan, which may require you to pay several hundred or thousand dollars at once.
- You can make a partial payment, which you might do if you come into some extra cash (i.e., a bonus at work, selling a valuable possession).
- You can also boost your monthly payments. If you switch to a higher-paying job or get a raise, increasing your monthly amounts will help you pay everything off sooner.
If paying off a loan early isn’t the right move for you, no need to worry—there are several other ways to save money when it comes to your car.
One of the best ways to save is by comparison shopping for a more affordable car insurance rate. If you want to leave the hard work of gathering quotes to someone else, just use Jerry!
A licensed broker that offers end-to-end support, the Jerry app browses quotes from over 50 top providers and can help you cancel your old policy and register for a new one.
It takes less than a minute to sign up, and the average Jerry user saves $879 a year on car insurance!
Pro Tip Tackle the remainder of your loan all at once by paying in full or chip away at the principal by making large lump-sum payments.
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FAQs about paying off a car loan
Why do lenders make it hard to pay off my car loan early?
Most lenders and banks have a simple prerogative: to make a profit. The sooner you pay off your car loan, the less interest you’ll end up paying, which is how lenders make a profit.
Some lenders now offer financing with precomputed interest to ensure you pay a set amount—no matter how quickly you pay off your loan.
Again, others have prepayment penalties written into their contracts, so be sure to read your loan terms carefully before signing.
Will refinancing save me money on my car loan?
Another option to save money on your car loan is to refinance it.
An auto refinance allows you to take out a loan with more favorable terms to help pay off your initial loan. Just like with insurance, you can comparison shop to find the best quotes from a variety of auto refinance lenders.
Once you’ve found the best lender for your situation, apply to refinance your loan and start reaping the benefits!