Can I Pay Off My Car Loan Early?
Whether you’re financing a new or used car in the Livingston area, you will have to pay monthly payments on time for your loan. But what if you can afford to pay more than your monthly amount? Can you pay off a car loan early? Absolutely! Paying off your car loan early is possible and the finance team at Casey's Frontier Chevrolet Of Livingston will walk you through the following topics in this guide:
- When paying off a car loan early is or isn’t a good idea
- How to pay off a car loan early
Is it Good to Pay Off a Car Loan Early?
If you have the means to and want financial freedom, then yes, it is good to pay off a car loan early. Still, you’ll need good financial planning and a lot of diligence. The upsides are lower interest paid overall, decreased chances of becoming upside down on your loan, and a lower debt-to-income ratio. However, if you’re trying to build your credit score, it may be better to keep on paying off the car loan at a steady rate as it takes time.
When Paying Off a Car Loan Early Makes Sense
- You have little or no other debts to take care of and would like to get your car loan paid off so you can free up money for other expenses.
- You have enough extra funds saved up or enough wiggle room in your budget that making larger monthly car payments won’t affect your emergency funds and other finances.
- You are attempting to lower your monthly expenses to plan for a larger financial goal, such as entering retirement or growing your family.
- You’re looking to improve your debt-to-income ratio.
When Paying Off a Car Loan Early Isn’t the Best Option
- You don’t have much extra funds set aside for emergencies.
- If you have an exceptionally good interest rate, it may be smarter to just continue making on-time payments in the agreed-upon monthly amount. The money you’d use to pay your loan off early could be better served if you set it aside in a retirement fund or for a future financial goal, such as a mortgage.
- You’re using your on-time, set monthly payments to build your credit history or raise your credit score.
- Some car loan agreements include prepayment penalties. If this is the case, you would of course want to avoid those penalties by adhering to your regularly scheduled payment amount.
How to Pay Off a Car Loan Early
There are a few methods you can follow to pay off your car loan early. Check them out before deciding which one makes the most sense for you in the Cookeville or Sparta area:
- Make Bi-Weekly Payments – Check with your lender first to ensure it’s okay to use this technique; divide your monthly car payment by two, then make that payment amount every two weeks. Using this method, you will effectively be making 13 full payments per year rather than 12.
- Round Up Your Payment Each Month – Each time you make a monthly payment, round up the amount to the nearest $50.
- Make One Extra Payment Each Year in One Lump Sum – If you’d rather not round up for each monthly payment using the above method, you can instead choose to make one large extra payment per year to achieve the same interest savings.
- Resist the Temptation of Skipping a Payment – Believe it or not, some lenders allow you to skip one or even two car loan payments per year. This may be tempting if you’re in the midst of a rough month financially, but it will only lengthen your loan term and tack on more interest.
- Refinance with a New Car Loan – Once you’ve made one or two years’ worth of on-time, in-full payments, you might be a good candidate for refinancing. Of course, you should only refinance if it’s securing you a lower interest rate. The lower interest rate will lower your monthly payment, making it easier to pay more than what’s required each month so you can pay off your loan early.
Learn More with Casey's Frontier Chevrolet Of Livingston!
Now that you know all about paying off your car loan early, our finance team would love to teach you more about auto finance topics. From buying vs. leasing to buying a car in another state, we got you covered!
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