Save Money By Paying Off Your Car Loan Early

profileCarly DeBeikes | May 17, 2022
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You can save a lot of money by paying off your car loan early, either by buying it outright or increasing your monthly payments. However, if your loan’s interest rate is not that high, it might be better to prioritize other loans.

Save Money by Paying Off Your Car Loan Early

There are many benefits to paying off your car loan early. One of them is saving money by lowering your monthly debt payments.

However, the ability and the decision to pay your car loan early comes with a few considerations—what your current interest rate is, what your monthly payment is, and if you can actually afford to pay off the rest of the loan in a single lump sum.

While paying off a car loan ahead of schedule will save some people money, it’s not for everyone. You should evaluate your financial situation before you make a decision.

Improving Your DTI (debt-to-income ratio)

If you can afford to pay off your car loan early, it will save you a lot of money.

For example, you can improve your debt-to-income ratio, which is how much debt you owe against how much money you make. If you have a low DTI, creditors and lenders are more likely to offer you favorable terms for applying for a credit card. If you can pay off your car loan, you will lower your DTI and likely qualify for offers and rewards down the road.

Of course, you can simply save money by paying your car loan ahead of time. Every payment you make on your car loan goes to the principal (your original borrowed amount) and also to your interest rate. If you pay more toward your principal, you will lower how much you will have to pay in interest for the duration of the loan, and this will save you money in the process.

Paying off your loan sooner than expected will also lower your car insurance payments, leaving more of your money at your disposal.

Owning the Car

Owning the car outright will also save you money. Without having to pay the lender, you are at liberty to sell the car and earn more from that sale than you would if there was still a loan on the car. Otherwise, the lender would be entitled to payment from the sale before you saw any of that money.

Additionally, having a car loan means that if you fall too far behind on your payments, the bank or the lender can repossess the car. A loan simply means that the car belongs to someone else, even if it’s parked at your house and you’re the only one who drives it. Paying off the loan puts the car solely in your possession, which means that you stand to make money for yourself if you decide to sell it.

Risks of Paying Off the Loan Early

However, there are risks to be aware of if you want to pay the loan off early. Some loan contracts might even penalize you if you pay off the loan before its term expires. This is because many vendors don’t want buyers paying off the loan too early (for example, at the six-month mark).

They would lose too much of your money this way. Instead, the loan contract might stipulate that you have to wait a longer period of time (for example, two years) before you can pay off the loan without incurring any fees.

If, on the other hand, you want to pay off the loan before that time, you might be able to do so. But this might not save you money, and it might end up costing you more than it’s worth.

While paying off your car loan early looks good to creditors and lenders, you might be better served seeing if your other debts are costing you more. If your car’s loan rate isn’t as high compared to your credit card debt, for instance, it might work out for you in the long run to hold off on your car loan and instead focus on your credit card (or whatever the debt with the highest interest rate is).

If your car loan’s interest rate is less than the rates on your other debts, then paying off the loan will save you money that you will likely have to spend paying off other interest fees.
Are You Ready to Pay Off the Loan?

If you’re ready to pay your car loan off early, you have some options to decide how to do this. You can pay off the full amount, make a partial payment, or increase the amount of your monthly payments. Examine your finances closely before you make your decision.

You should only consider paying off your car loan if you are sure you can afford it and you have no other significant financial obligations. You should also only consider this if you don’t have other outstanding debt. As mentioned earlier, paying off your credit cards might save you more money than paying off a low-interest car loan.

Lastly, it is a good idea to think about paying off your car loan if you’re saving for a big purchase that requires a loan, such as a new refrigerator or other major appliance. Having cash on hand and a low debt-to-income ratio looks good to lenders.

Paying off a car loan early isn’t for everyone. It is a big financial decision, and while it can save you money, it can also cost you.

If you don’t have the money to get ahead of your loan payments, you can look at refinancing your car loan, which will lower your interest rate and reduce the amount of interest you are due for the length of the loan. However, this can also increase the number of monthly payments you have to make.

Sometimes, paying off your car loan early to save money is not as easy as it sounds, so talk to your car dealership and your bank to see what works best for you. You can also save money in other ways—like using Current’s Saving Pods to earn 4.00% Annual Percentage Yield (APY). You can quickly create savings goals and put aside money to save toward big purchases. Saving Pods are easy to use and you earn money daily on funds so you can save money without too much effort.


References

Should You Pay Your Car Loan Off Early? (October 2021). Forbes.

This 40-Year-Old Puts an Extra $600 Toward His Car Loan Each Month So He Can Pay It Off Early—Here’s Why That’s a Smart Approach. (July 2021). CNBC.

Do You Have Enough Available Income to Qualify for a Car Loan? (February 2020). The Car Connection.

The Pros and Cons of Paying Off Loans Early. (August 2020). US News & World Report.

Which Balance Should You Pay Off First? (September 2015). CNBC.

5 Ways To Pay Down Your Car Loan And Save Money. (May 2021). Fox Business.

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