It's possible to pay off a car loan early, and doing so comes with many advantages. Not only are there many benefits to paying off your auto loan early, there are several easy ways you can accomplish this.
The Benefits of Early Auto Loan Payoff
Paying off a car loan early can benefit you both financially and credit-wise.
Financially, the most obvious benefit of paying off your auto loan early is that it saves you money. Car loans are simple interest loans, which means you pay interest charges based on the loan balance. So, paying the loan off ahead of schedule naturally saves you money on interest charges.
If you're struggling with credit issues, this is an especially impactful benefit, because your interest rate is likely to be higher than someone with good credit. Higher interest rates mean higher interest charges, so you're saving even more money by paying off your loan early.
Credit-wise, you're going to see an improvement in your credit score over time just by making on-time payments each month. However, if you're carrying a lot of debt, like multiple installment loans (auto loans, mortgages, student loans, etc.), reducing the amount of debt that you have by paying off a car loan can also greatly improve your credit.
Methods of Early Auto Loan Payoff
Paying off your car loan early doesn't mean you have to come up with all the money you owe and pay it in one lump sum – although, if you have the cash, this is one way to close out a loan quickly. Generally, though, even people who are eager to pay off their auto loans ahead of schedule need a little more time to get things done.
Most borrowers use one of four methods to pay off a car loan early:
- Pay extra when you can – Any extra cash you can add to your auto loan payment reduces the loan balance ahead of schedule, even if it's just $20 or $100 here and there. Whatever extra cash you pay reduces the principal and helps reduce the interest charges over the loan term.
- Round up – A simple way to keep paying down your balance early is to round up when you're making a payment. For example, if your monthly payment is $346.58, you could pay $350 or even $400 instead. The beauty of this is that you don't have to do it every time if you can't afford to.
- Bi-weekly payments – In this method, you make a half payment every two weeks. If you do this for a whole year, you end up making 13 monthly payments instead of 12. Doing this over the course of a 60-month loan pays it off in around 55 months and can save you hundreds of dollars or more in interest charges.
- Payment splitting – With payment splitting, you make a half payment twice a month, one a couple of weeks before the due date, and one on or near it. You're not actually increasing the number of payments you make, but you're saving money. By reducing the principal with each payment, you reduce the interest charges over the term of your loan. Short-term, it may seem like small change, but over the life of your loan, the savings can really add up.
These options don't involve any changes to your loan contract, but they offer a big advantage in the end. Additionally, if you make enough extra payments as you go along, you can set yourself up to help prevent damage to your credit score from a late payment if something unexpected such as job loss happens.
Lastly, if your loan is in good standing and your credit has improved enough, you may be able to refinance it at a lower interest rate. This is typically only an option if your current loan has been in good standing for at least 24 months. The only other reason you would want to look at this option is if you needed to extend your loan term to lower your monthly payment. Be aware, however, that stretching a loan for too long is never recommended.
Financing Help That Pays Off
If you're looking to pay off an auto loan early, any of the methods above can be helpful. If you've already paid off your car loan, or are researching your options for your next vehicle when you do, look no further!
At The Car Connection, we specialize in connecting buyers to the dealerships that have lenders available to work with people in many types of credit situations. If you're looking for a special finance dealer for your next auto loan, let us help guide you to one in your area. Skip all the hassle of driving from dealership to dealership, and fill out our car loan request form to get the process started today!