What Happens When You Pay Off a Car Loan Early

If you’ve ever wondered what happens when you pay off a car loan early, you’re not alone. Here’s a look at what you can expect when you make that final payment.

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Introduction

If you’re like most people, you probably want to pay off your car loan as soon as possible. After all, who wants to be saddled with debt? But what happens if you pay off your loan early? Is there any downside?

The short answer is no, there is no downside to paying off a car loan early. In fact, there are quite a few upsides. For one thing, you’ll save money on interest. The longer you take to pay off a loan, the more interest you’ll accrue, and that can add up to a lot of money over time.

Paying off your car loan early will also save you money in the long run because you’ll be able to get rid of your car sooner. As soon as you pay off your loan, your car is technically yours and you can sell it or trade it in whenever you want. If you wait until the end of the loan term to sell or trade in your car, you may end up owing more money than the car is actually worth.

So if you’re thinking about paying off your car loan early, go for it! You’ll save money in the long run and be debt-free sooner than you thought possible.

The Benefits of Paying Off a Car Loan Early

Paying off a car loan early comes with a number of benefits. One benefit is that you will save money on interest. The longer you take to pay off your loan, the more interest you will accrue, and this can add up significantly over time. Another benefit is that you will improve your credit score.

Save on interest

If you pay off your car loan early, you’ll save on interest. That’s because the sooner you pay off the loan, the less time interest has to accrue. This can be a significant amount of money, depending on the size of your loan and the interest rate. For example, if you have a $15,000 loan with an interest rate of 10%, and you pay it off two years early, you’ll save more than $2,000 in interest.

Improve your credit score

One of the benefits of paying off a car loan early is that it can help improve your credit score. By paying off the loan, you’ll be reducing your debt-to-income ratio, which is one factor that credit scoring models use to calculate your score. A lower debt-to-income ratio can lead to a higher credit score.

Get a lower insurance rate

One of the benefits of paying off a car loan early is that you may be able to get a lower insurance rate. If you have a loan on your car, your lender will likely require you to have full coverage insurance. Once you pay off the loan, you can switch to liability-only coverage, which is much less expensive. You may also be able to get a discount on your premium if you have paid off your car loan early.

The Drawbacks of Paying Off a Car Loan Early

Paying off a car loan early can be a great way to save money on interest. However, there can be some drawbacks to doing so. For one, you may have to pay a prepayment penalty. This is a fee that the lender charges for you paying off the loan early. Another downside is that you may not be able to get the same interest rate if you need to finance another vehicle in the future.

You may lose your precomputed interest

If you have a loan with precomputed interest, you’re essentially paying for the interest that has accumulated up until the point of payoff. So, if you paid $100 a month for 30 months, you’ve already paid the interest for those first 30 months in full. But if you pay off your loan early, you’ll still owe that remaining $900 in interest. In this case, it may be better to keep making your regular payments until the very end.

You may have to pay a prepayment penalty

One potential drawback of paying off a car loan early is that you may have to pay a prepayment penalty. A prepayment penalty is a fee that lenders sometimes charge for borrowers who pay off their loans early. So, if you have a $250 prepayment penalty and you pay off your loan two years early, you’ll owe the lender $500.

In order to avoid a prepayment penalty, you can shop around for lenders that don’t charge them or make sure to read the fine print before signing a loan agreement. You can also refinance your car loan to avoid a prepayment penalty. When you refinance, you take out a new loan with different terms and use the proceeds to pay off your old loan.

How to Pay Off a Car Loan Early

If you have a car loan, you’re not alone. In fact, as of 2019, the average car loan was $393 per month. But what happens if you want to pay off your car loan early? Is it possible? And if so, how? Let’s take a look.

Make biweekly payments

To pay off your car loan early, one option is to make biweekly payments instead of monthly payments. With biweekly payments, you make half of your monthly payment every two weeks. This means you end up making 26 half-payments each year, or the equivalent of 13 monthly payments. By making biweekly payments, you can save money on interest and pay off your loan early.

Another option for paying off your car loan early is to make a lump sum payment. You can make a lump sum payment at any time during the life of your loan. If you have extra money, you can apply it towards your principal balance and save on interest. Or, if you receive a windfall (such as a tax refund or an inheritance), you can use it to pay off your car loan completely.

If you have good credit, you may be able to refinance your car loan and get a lower interest rate. This will lower your monthly payments and help you pay off your loan early. To qualify for a refinance, you will need to have good credit and a steady income.

Making extra payments towards your car loan is a great way to save money on interest and pay off your loan early. Talk to your lender about the best way to make extra payments, and start working towards becoming debt-free today!

Round up your payments

If you want to get rid of your car loan as quickly as possible, one strategy is to round up your payments. For example, if your monthly payment is $300, you can pay $350 instead. This extra money will go towards the principal of your loan, which means you’ll pay it off faster.

Of course, this strategy only works if you can afford it. You don’t want to put yourself in a situation where you can’t make your payments and end up defaulting on your loan. But if you have some extra money each month and want to get rid of your car loan ASAP, rounding up your payments is a good option.

Refinance your loan

If you have good credit, you may be able to refinance your car loan and save money. Refinancing essentially means taking out a new loan with different terms. This could involve extending the loan term to get a lower monthly payment, or switching to a different type of loan altogether.

Before refinancing, it’s important to compare offers from multiple lenders to make sure you’re getting the best deal possible. Keep in mind that refinancing will also add more time onto your loan, so you’ll need to weigh the pros and cons carefully before making a decision.

Another option for paying off your car loan early is to trade in your vehicle for a new one. If you still owe money on your current car, the dealership may be able to roll the remaining balance into your new loan. This could help lower your monthly payments and pay off your debt more quickly.

Of course, trading in your car also means you’ll have to purchase a new one, so this option may not be ideal if you’re trying to save money. Nevertheless, it’s something to consider if you’re thinking about upgrading anyway.

Conclusion

Paying off your car loan early can be a great financial move. It can save you money on interest and help you become debt-free faster. There are a few things to consider before you make the decision to pay off your loan early, such as any prepayment penalties you may incur. But if you’re able to do it, paying off your car loan early can be a great financial decision.