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Should you pay off a car loan early?
Would it be a bad idea to pay off my car loan early? I recently came into some money unexpectedly. I can afford to pay off the rest of my loan, but I’m not sure if that’s allowed.
Liz Jenson · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
It might be a good idea to pay off your car loan early, but you’ll need to look at your loan contract to confirm. Some lenders will charge a
prepayment penalty
if you pay off your loan before the stated date. This fee covers some or all of the interest that you won’t be paying. If the prepayment penalty is more than the interest on the remainder of your loan, it’s better to keep making payments each month.If you decide to pay off your loan early, there are a few different strategies that you can use:
- One lump sum payment.
- Make at least one additional large payment each year.
- Pay half of your monthly bill every two weeks.
- Round up all of your payments to the nearest five, 10, or 100 dollars.
If you’re trying to rebuild your credit or increase your score, you may want to consider waiting to pay off your loan as well. While reducing your debt is important, paying your loan in full can temporarily decrease your credit score. Having a history of making payments on time can increase your credit score, especially if it’s something you struggled with in the past.
If your financial situation has changed since you took out your last auto loan, it may be time to refinance. Download
Jerry
to see if refinancing your car loan can save you hundreds of dollars per month.View full answer
- Gregory R.
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