Paying off your car loan ahead of schedule can save you money. In most cases, it is possible by paying one extra month or adding a specific amount to the monthly payment. See this example (Figures are based on results yielded by our Automobile Loan Payoff Calculator.):
Let’s say you have the following terms in your current car loan:
• Loan Amount: $20,000
• Monthly Payment: $331
• Loan Term: 72 months
• No. of Remaining Months: 36
• APR: 6%
• Total Payments: $23,865
If you pay an additional of $200 every month, here’s how much you’re going to save:
• New Monthly Payment: $531
• Total Accelerated Payments: $23,457
• Total Savings: $408
Take note as well that you will pay off the loan 14 months earlier than the original payoff date by paying extra each month. This is how early payoff can save you money. Unfortunately, it is not always the best move for all borrowers repaying a high-interest car loan.
When to Do It
You have some money to spend.
You cannot plan on paying off your car loan early if you don’t have the money to make it possible. Like the example above, you need to shell out extra to accelerate the payoff time.
Perhaps you received a cash prize or income from your side job or have set aside a considerable amount of money for your emergency fund. Use the extra cash you have to put more money into your monthly payment and get out of debt sooner.
You want better credit.
Early car loan payoff does not directly affect your credit score. However, getting rid of your debt as soon as possible may affect your debt-to-credit ratio positively. A better debt-to-credit ratio can improve your credit score.
Refinancing gave you more leverage.
You can pay off your car loan if you are able to refinance it for a lower interest rate. Refinancing saves you money and this allows you to increase your monthly payment.
When Not to Do It
You’re short of funds.
Look at your monthly cash flow and if there’s no extra money to put into your monthly payment, forget about paying off your car loan early. Forcing early payoff when you’re strapped for cash will only bring you deeper into debt.
There’s a prepayment penalty.
Some lenders charge borrowers a specific—and usually hefty—amount for paying off their car loans ahead of schedule. They do this to compensate for the interest payments they would not receive. If this penalty amounted into a huge amount, it’s better to finish your payments with your original loan instead of paying it off sooner.
As a final note, weigh the pros and cons of paying your car loan off sooner before making any move. Whether or not it is possible for you to get rid of your auto loan payments quicker, what is more important is making timely payments.