Did you know that you have the option to pay off your car loan early?
There are a variety of ways that you could pay off your loan early, but there are several advantages and disadvantages to make sure you consider before you make any decisions. We’re here to help you decide if paying your car loan off early is the best choice for you.
Advantages of Paying Off a Car Early
There are many advantages that come from paying your car loan off early. From saving money to improving your financial situation, here are some reasons why you may consider paying your car off early:
Save on Interest: When you pay off your loan early, you’ll pay less interest on the overall loan. Rather than paying the interest that would have accrued during the life of the loan, you’ll only pay the interest that accrued during the time that you had the loan. This is a great way to save money and a great advantage to paying off the loan early.
Improve Your DTI: Your debt-to-income (DTI) ratio reflects how much debt or credit you have in comparison to your income. Lenders use this DTI ratio as part of their approval process to ensure that they don’t lend out more than a borrower can pay back. When you pay off your car loan early, you lower your DTI ratio, improving that aspect for any future loans and credit availability.
Monthly Payments End: Once you’ve paid off your car loan, you no longer have to make a monthly payment to the lender for your vehicle. This is a huge benefit as it frees up those funds to be used however you would like to use them. The extra funds can be a great help if you have other savings goals or want to make adjustments to your budget.
Avoid Being Upside Down: Paying off your car can save you from being upside down in your car loan. This happens when you owe more money on your car loan than the value of the car. Being upside down in a car loan can be a tough situation, something that you can help avoid by paying your loan off early.
Related: How to Get Out of an Upside Down Car Loan
Ownership of Your Car: Another benefit of paying your car off early is that you’ll get to own your own car. While you have a loan on your vehicle, the lender technically has ownership of the vehicle and can repossess it if the loan agreement is not met. Once you’ve paid off your car, you’ll take ownership of the vehicle from the lender.
Disadvantages of Paying Off a Car Early
While there are many advantages to paying off a car early, there are a few disadvantages that you may want to keep in mind.
Prepayment Penalties: Sometimes paying your car off early can result in prepayment penalties. This can often be a condition of a reduced purchase price or special financing offer. In order to avoid these penalties, you may need to keep your car loan for a set amount of time – but you still may be able to pay it off early.
Strain Your Finances: If paying your car off early puts strain on your financial situation or is out of reach financially, it may not be a viable option for you at this time. Instead, it may be best to continue making your monthly payments.
Credit Score Decrease: Your credit score is tied to what credit is open and the payments being made toward those debts. When you pay off your car loan early, you’ll likely experience a short-term decrease in your credit score as that debt is no longer there. This is normal, but it can be a pain if you’re trying to qualify for something else in the immediate future.
Related: How to Get a Car Loan with Bad Credit
Tips to Paying Off Your Loan Early
Paying your car loan off early can help you save money and enjoy the many advantages that come with it. This may even be more achievable than you think. Here are some tips that can help you pay off the loan early:
Pay a Little Extra: Pay a little extra towards each of your monthly car payments. This amount depends on how much extra you feel comfortable paying, but a simple way could be to round up each payment. This extra amount can add up over time, helping you pay down your balance faster and potentially helping you pay less in interest.
Pay Every 2 Weeks: If you split your loan payment in half and make a payment every 2 weeks for half the amount, instead of the full amount monthly, you’ll actually end up making 13 monthly payments instead of 12. This can be a great way to pay off your loan faster without feeling overwhelmed. It is important to verify with your lender to ensure that this form of payment is accepted on your loan.
Refinance Your Loan: You may find yourself in a better financial position now than you were when you got your loan. This could be a change in income or bills, or even a change in your credit score and the interest rates that you can qualify for. Refinancing your loan could allow you to get a shorter loan term and enable you to pay off your loan quicker than previously planned.
Utilize Extra Funds: There are other funds outside of your usual income that can be allocated to help pay off your car loan early. This can include bonuses, tax refunds, birthday money, or even the funds from a pay raise. Using these extra funds won’t throw off your regular budget and can help you pay down the loan much faster.
There are many advantages and several disadvantages to consider before moving forward with paying off your car loan early. If your situation allows it, it can be a great financial choice – even if you take the small steps that have been mentioned to get there.
