If you’re considering paying off your auto loan early, there are a few different things to consider – your credit score, your other debts, and your next step. We’ve put together a list of reasons to pay your loan off early, along with some other considerations to help with your decision to complete that car loan.
Pros of Paying Off Your Auto Loan Early
One of the main reasons why borrowers pay their car loan off early is because they’re looking to save money and free up monthly income. Here’s what paying off that auto loan could do:
- Disposable income – Without that car loan payment each month, you now have extra disposable income, along with the relief of one less bill to worry about.
- Future loans – A completed auto loan can look great on your credit reports when you’re applying for another car loan, since the completed loan is now marked “paid as agreed.”
- Interest charges – Since you no longer have to repay the loan, say goodbye to those interest charges. Auto loans usually have simple interest, so the longer the loan, the more you pay.
- Equity – You can’t be upside down on a vehicle you've paid off! Negative equity is no longer a concern for you. This also means that if you’ve been paying for GAP insurance to cover that negativity equity, there’s one less expense to worry about.
- Car insurance – Lenders require that borrowers have full coverage insurance on a financed vehicle. Now that the car is paid off, you can choose whatever auto insurance coverage you’d like that meets your state's requirements. Having full coverage is usually the best way to protect yourself and your vehicle, but having cheaper insurance can be a money saver if your full coverage policy was expensive.
Cons and Considering Your Options
Once you hit the tail end of your car loan, it can be tempting to pay it off quickly. Here are some things to mull over before you do:
- Savings – If you’re using your savings to pay off the loan early, your nest egg is going to be depleted. To avoid completely draining your savings account, consider making double loan payments instead, to keep some money aside for emergencies while still paying your loan off earlier.
- Credit improvement – Keeping the loan open for the full term and making all the payments on time could result in a more positive impact on your credit score. Payment history is the most influential factor when it comes to calculating your credit score.
- Temporary credit drop – Your credit score could drop, but in most cases, it'll only go up by the early payoff. In fact, the completed loan will also reduce your amounts owed, further improving your credit score.
Finishing Up That Car Loan
There are quite a few benefits to paying your car loan off early. If you think you can afford this, then it could be a great way to free up your income for other things. However, if you just started the auto loan and you were looking to build your credit score with a good payment history, then perhaps paying your car loan for at least a couple of years might be in your best interest.
If you’re thinking about investing in another vehicle but your credit score isn’t great, we want to help. At The Car Connection, we can connect you with a dealer that may be able to work with your unique credit situation. To get started, simply fill out our free, custom auto loan request form.