Can I Pay Off My Car Loan Early?

If you make the decision to finance your new or used car, you’ll make an agreement to pay a set amount each month until the loan is paid off. While sticking to your monthly payment amount is just fine, you may be wondering what happens if you’d like to pay more than what’s due on your monthly bill. Is it good to pay off a car loan early? Yes! Paying off a car loan early is a great option for many Hartford drivers. Below, our finance team will cover:

• When paying off a car loan early makes sense
• How to pay off a car loan early

Discover if you should start working towards paying off your car loan early with our expert team today!

Is it Good to Pay Off a Car Loan Early?

Paying off your loan and taking ownership of your vehicle ahead of schedule takes a lot of diligence and planning. However, the rewards of your hard work can include lower interest paid overall, diminished chance of becoming upside down on your loan, a lower debt-to-income ratio, and greater financial freedom. While these benefits are fantastic, sometimes it makes more sense to stick to your normal payment schedule. We’ll break things down below.

When Paying Off a Car Loan Early Makes Sense

• You have little to no existing debts to pay off and would like to add financial flexibility by paying off your car loan.
• You have a healthy fund saved up for emergencies, or your monthly budget affords a bit of wiggle room for larger payments.
• You’re attempting to lower your monthly expenses to make room for larger financial goals, like entering retirement or growing your West Hartford family.
• You’re hoping to improve your debt-to-income ratio.

When Paying Off a Car Loan Early Isn’t the Best Option

• You have a small or non-existent emergency fund.
• If you have an extremely good interest rate, it may be wiser to continue making regular payments. In this case, the extra money you’d use to pay off the loan would be better served set aside for retirement, or for another larger goal.
• You’re using your on-time, regular monthly payments to establish a stronger credit history and boost your credit score.
• Some car loans have prepayment penalties. If this is written into your loan, you would absolutely want to avoid incurring any penalties by sticking to your agreed-upon payment amount.

How to Pay Off a Car Loan Early

There are a number of ways to pay off your car loan early. Explore the options below to decide which plan fits best with your budget and lifestyle:

• Make Bi-Weekly Payments – First, check with your lender to be sure that this technique is allowed with your agreement. Divide your monthly car payment by two, then make that payment amount every two weeks. This technique will lead to making 13 full payments a year rather than 12.

• Round Up Your Payment Each Month – With every payment, round up to the nearest $50. While likely to have little impact on your monthly finances, every extra bit counts when paying down debt!

• Make One Extra Payment Each Year in One Lump Sum – If you prefer to keep things simple and avoid extra monthly payments or rounding up each month, simply make one larger lump sum payment each year to reduce what you owe.

• Resist the Temptation of Skipping a Payment – Some loan agreements offer the opportunity to skip one or two payments per year. While this can be tempting if you’re having a tough financial month, this practice will extend your loan duration and result in more interest paid in the end.

• Refinance with a New Car Loan – After a year or two of consistent payments, you might be a strong candidate for refinancing. You should only consider refinancing if you can secure a lower interest rate.

Learn More with Acura of Avon!

So, is it good to pay off a car loan early? Oftentimes, learning how to pay off a car loan early and sticking to your plan is a great idea. Our team can help you make the final decision if paying off your car loan ahead of schedule makes sense for your circumstances. If you have any questions during your car ownership journey, contact us today for assistance.