Get Started
Talk to our team to start saving 800.260.5355
With more and more Americans late on loan repayments, you’re not alone if you’re reevaluating your finances and wondering whether to pay off an auto loan early. Doing so could reduce the amount of interest you pay and free up some cash each month for other priorities.
However, there may be some downsides you should consider. In this article, we’ll explore the pros and cons of early repayment on auto loans, helping you decide if it’s the right choice for you.
Paying off your car loan early could save you money over the life of the loan. Here are some of the primary benefits of an early payoff:
Settling your debt early reduces the total interest you pay over time. For example, if you had 48 months remaining on a 60-month loan for $28,000 at 7% interest, paying an extra $50 a month would shorten your loan term by 4 months — saving you $346.41 in interest payments. Small monthly payment increases might help you pay off your loan early and save.
An early payoff could lower your debt-to-income ratio (DTI), a critical factor in credit scoring. Lenders use DTI to estimate your ability to manage monthly payments to repay money you plan to borrow. Lowering this ratio may improve your financing options for mortgages or other loans.
Once your car loan is paid off, you can redirect the money used for monthly payments toward your other financial goals. This increased cash flow may provide you with more opportunities to save, invest or reduce your other debts.
Paying off your car loan early means you get full ownership of your vehicle sooner. That may increase your options to sell or trade it in. It also allows you to make decisions about your car without the burden of debt — such as whether to lower your insurance coverage.
If your car’s value drops faster than you pay down the loan, you risk becoming "upside-down" — owing more than the car is worth. This can make it difficult to sell or trade in because you’d need to pay the difference in equity between your car and your loan. Early repayment could help you avoid this scenario.
It’s also important to know the potential disadvantages of paying off a car loan early. These include:
Some lenders might have fees for paying off your loan early. These fees may reduce the financial advantage of an early payoff, so make sure to check your loan terms before acting.
Redirecting funds to pay off your car loan may leave you with less cash for your other financial goals. Building an emergency fund, paying off high-interest debt or investing might yield better long-term financial results than paying off your loan early. Consider your bigger financial picture before committing to an early payoff.
Eliminating debt generally benefits your finances. However, paying off a car loan early might lower your credit score in the short term. This can occur due to a change in your credit mix — lenders like to see a variety of credit types such as mortgages, car loans and credit cards. In most cases, credit score dips after paying off a loan are temporary.
It can make sense to pay off a loan early if:
It may be better to avoid an early payoff if:
Paying off your car loan early is not always the best option. It is important to consider both the costs and benefits to determine if early payoff will help you achieve your financial goals.
If you decide that paying off your car loan early isn't the right choice, refinancing may be an alternative way to save. For example, getting a new loan with the same term but a lower interest rate may lower your monthly payments. By paying the same amount as before your refinance, you could pay down the loan faster and save on interest.
Like paying off your loan early, consider the pros and cons of refinancing before you take action. Learn more about the refinancing process and whether it’s right for you by visiting our guide on how to refinance a car.
Here are some common questions about paying off car loans early to help you make informed decisions.
Paying off your car loan early may reduce the amount of interest you pay and improve your debt-to-income ratio. Before you commit, consider if the funds needed for an early payoff would be better used to resolve higher-interest debt, like a credit card. Overall, evaluating your financial situation and the details of your loan can guide you towards the best decision.
Paying off your car loan early may temporarily lower your credit score. This occurs because an early payoff can reduce your credit mix, which is a key factor that lenders consider. However, the long-term advantages of reducing your overall debt typically outweigh any short-term impacts on your credit.
Some lenders might charge prepayment penalties for settling a car loan early. These fees vary by lender, loan type and state law, so review your loan agreement before acting. If penalties apply, consider the costs versus the benefits of paying off the loan early.
Yes, paying off your car loan early generally decreases the total interest paid over its duration. Interest is calculated based on the remaining balance, so reducing the principal sooner means less interest accrues.
Some lenders might charge prepayment penalties, but many don’t. Check your loan agreement to be sure. Some common ways people get out of a car loan early include selling or trading in the vehicle to pay off the loan, making extra payments or refinancing for more favorable loan terms. Some lenders may allow loan assumption, which lets another person take over your payments.
Learn how refinancing affects your loan and if it restarts the term or just adjusts payments. Understand the full impact of refinancing your auto loan.
