Is it possible for you to pay off a car loan early?
I just got married and my husband and I want to buy a house. Before we do, I want to get rid of some of my debt. Can I pay off my car loan early?
Yes, you can certainly pay off a car loan early and in many ways, it’s a smart move! However, you have to weigh both the pros and cons before proceeding.
The upsides of paying off your loan early include:
- No more car payment
- Less debt
- Ability to sell the car without having to pay off a loan balance
- Ability to carry whatever insurance you want
The last one is especially important as you’re aren’t confined to carrying full coverage car insurance. You could keep that insurance, but you also have the choice of going with liability coverage only.
That said, paying off your car loan will have these effects:
- A temporary drop in your credit score. When you pay off a debt, you have less credit overall. You often also decrease the age of your credit history.
- Possible prepayment penalties. The prepayment penalty is perhaps the more important thought here, as it can cost between 2% and 4% of the remaining balance. Lenders charge these fees to make back the interest they could lose when a borrower pays their loan off early.
To determine whether your lender charges prepayment penalties, look over your loan agreement or contact them directly.
If your lender charges prepayment penalties, another option is to refinance your loan. By refinancing your auto loan, you can reduce its interest without additional fees.
For an easy way to explore your refinancing options, use the Jerry app. Jerry connects you with top lenders in minutes.
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