What happens if I pay my car loan early?

I make more money now than I did at the start of my loan. What happens if I try to pay my car loan off early?

Answer
Glad to hear that you make more money! Paying off your loan early can definitely offer some monthly payment relief. Keep in mind that there can be both pros and cons to paying off your car loan early!
Here are some pros of paying off your loan early:
  • You save money. Paying off your loan early can help you save big on interest charges. However, this only applies if you have a simple interest rate and not a compound. A compounded rate means you will have to pay the entirety of the interest, whether you pay it off early or not. Check your loan terms to see which interest rate applies to you.
  • Lower DTI ratio. Paying off your loan early will decrease your debt-to-income ratio, meaning there is a larger gap between how much money you make and the amount of debt you have. Having a lower DTI ratio gives you more financial freedom.
Some cons of paying off your loan early are:
  • Prepayment penalties. Some lenders charge a penalty when you pay off your car loan early. Lenders lose out on the interest you would normally pay if you kept the loan for the full term, so they charge fees to make money back.
  • Lower credit score. Instead of focusing on paying off your car loan, you may want to keep the account open and allow it to build your credit. Older, more established loan accounts can offer a big boost to your credit score.
If your financial situation has changed since you took out your last auto loan, consider refinancing. Download Jerry to see if refinancing your car loan can save you hundreds of dollars per month.
Matthew Macgugan
Answered on Dec 08, 2021
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