Paying Off a Car Loan Early: Everything You Need To Know

When car financing companies set the terms of a loan, they provide a time frame and an interest rate. For example, perhaps the loan term is 72 months with an interest rate of 20%. The dealer will divide the total cost of the loan by 72 to determine your monthly payment, plus the 20% interest. 

Paying off a car loan early lets you avoid some of the interest you would have otherwise owed, saving you money in the long run. However, some loan terms penalize you for early payoff, so it’s important to understand your loan terms before doing so. 

How To Find Out Whether You Can Pay Off Your Car Loan Early 

Request a copy of your loan agreement from the lender and read the terms closely. If the lender penalizes early payoff, a section of the agreement should discuss this. It will detail the penalty you will face, such as owing a fee on top of the original amount or still owing the same interest you would have otherwise paid. 

Many loans have no penalties for early payoff. If you’re still not sure whether yours does, contact your lender directly to ask them. Even if an early payoff would penalize you, that penalty still may be worthwhile if you can save money on interest. 

Benefits of Early Payoff

Can you pay off a car loan early? In many cases, yes, and doing so poses several benefits:

• Saves you money on interest: Many auto loan rates are steep, and your interest savings with an early payoff can equal a significant amount of money. Even if you pay your loan off only one month early, you’ll still save money. 
• Lets you own your car outright sooner: You won’t be tethered to your auto lender any longer; you will own your car outright. 
• Lowers your monthly expenses: You’ll have more money freed up each month to put toward other financial goals. 
• Better debt-to-income ratio: Paying off debt improves your debt-to-income ratio, which helps you qualify for future loans and may improve your credit. 
  
  

Early Car Loan Payoff Strategies 

Paying off a car loan without penalty may sound like an excellent idea, but it isn’t for everyone. If you don’t have many extra funds set aside, you may want to hold on to your money in an emergency. If your interest rate is low, keeping the extra money in a high-yield savings account may make more sense than using it to pay off the loan. 

But if you do want to pay off your car loan early, these strategies can help: 

• Make biweekly instead of monthly payments: If your lender permits it, split your monthly payment in half and make it biweekly. This strategy allows you to make 13 payments in 12 months. 
• Pay down your loan principal: Use some of your savings to pay extra toward your loan, reducing the loan principal you need to pay off. 
• Round up your payments: Start contributing more toward your monthly payments, such as rounding them up to the nearest $50. 

Find the Right Car Loan for You With Edge Financial Services, LLC 

Can you pay off a car loan early? 1803 Capital, can help you explore your car loan payoff options and find a financing solution that works for you. Contact us today to learn more about our lending programs and payoff terms.