If you’re aiming to get out of debt, you might be asking yourself, can you pay auto loan off early? Paying off your car before the loan term ends can be a good move especially if your interest rate is high.
But, it may not always be the best choice if there are other ways to use your money more effectively. Here’s when it makes sense and when it doesn’t to pay off your car loan early.
If you have extra money, you might be wondering if paying off your car loan early is a good idea. Debt can be stressful, and car loans are usually the second biggest debt most people have.
So, when does it make sense to pay off your car loan early? What are the pros and cons? While it might feel tempting to pay off your car loan right away, it’s important to think about a few key things before making that decision.
Who Should Consider Paying Off Their Car Loan Early?
1. If You Have a High Interest Rate:
In early 2024, the average interest rate for used car loans was 10.17%. If your rate is high, paying off the loan early can save you money by reducing the total interest you pay.
2. If You’ve Received a Windfall:
If you get an unexpected lump sum, like an inheritance or bonus, using it to pay down your car loan could be a smart move.
3. If You’re Planning a Big Purchase:
Paying off your car loan can free up money for other large purchases or investments.
4. If Your Income Has Increased:
A raise can be a great opportunity to pay more than the minimum on your car loan, helping you pay it off faster.
Tip: If you decide to pay off your car early, ensure that any extra payment goes toward the principal, not just the interest.
Read more: The Best First Time Car Buyer Program With Bad Credit
Pros and Cons Of Paying Off Car Loan Early
| Benefits of Paying Off Your Car Loan Early | Drawbacks of Paying Off Your Car Loan Early |
|---|---|
| Save Money on Interest: Paying off your car loan early can reduce the amount of interest you pay over the life of the loan. | Prepayment Penalties: Some loans charge a fee for paying off early, which could make early repayment less beneficial. |
| Enjoy Full Ownership: Once the loan is paid off, you own the car outright. | Potential Dip in Credit Score: Paying off the loan could affect your credit mix and temporarily lower your credit score. |
| Free Up Room in Your Budget: Without monthly payments, you’ll have more money to save, invest, or use for other financial goals. | Focus on Other Debts First: If your car loan has a low interest rate, it might be better to focus on higher-interest debt (like credit cards) instead. |
| Lower Debt-to-Income Ratio: Paying off your car loan reduces your overall debt, which could improve your debt-to-income ratio and creditworthiness. | Financial Strain: Paying off the loan early might deplete your savings, potentially causing financial hardship. |
| No Risk of Being Upside-Down: Paying off the loan eliminates the risk of owing more than the car’s value if it depreciates. | |
| Freedom to Adjust Insurance: After paying off the loan, you may be able to lower your car insurance coverage, saving money. | |
| Easier to Sell or Trade-In: Full ownership means you’ll have the title available when selling or trading in your car, making the process smoother. |
Strategies for Paying Off Your Car Loan Early
If you’ve decided that paying off your car loan early is the right choice for you, there are several ways to do it.
The method you pick will depend on your monthly budget or how much extra cash you have available. Ready to start paying off your car loan? Here are some options to consider:
1. Make a Lump-Sum Payment:
Best for those with a windfall or who prefer not to carry debt.
If you have the funds, paying off your car loan in one lump sum can eliminate the debt in one go. Contact your lender to get the exact payoff balance.
2. Pay More Than the Minimum Each Month:
Best for those who’ve received a raise or can afford to pay extra.
Paying more than the minimum each month can reduce your loan term and save you money on interest.
3. Pay Off Your Loan in Full
If you have extra money saved up or receive a lump sum, consider paying off your car loan all at once. Make sure you can afford to do this without hurting your financial stability. Then, ask your lender for a 10-day payoff amount, which includes the balance of the loan plus any interest for the next 10 days. Once you get this amount, make the payment quickly so the lender receives it on time. After they process the payment, you’ll receive the title and fully own the car.
4. Make Payments Every Two Weeks:
Best for people who can handle making more frequent payments.
By paying every two weeks instead of monthly, you’ll make 13 payments per year instead of 12. This can help you pay off your loan faster and save on interest. But check with your lender to make sure they accept biweekly payments.
5. Refinance Your Auto Loan
Refinancing your car loan can help you pay it off faster and save money on interest in some cases. If you have a high interest rate and your credit score has improved, refinancing might give you a lower rate, saving you money and allowing you to pay off your loan quicker.
You could also refinance for a shorter loan term to pay off your car sooner and with less interest. Just make sure to check for any fees associated with refinancing, so you’re not paying more in the long run.
Read more: Pre Approved Car Loan Without Affecting Credit in 2025
When is paying off your car loan a good idea?
There are a few things to think about before deciding whether to pay off your car loan or use the extra money for something else. Paying off your car loan early makes sense if:
✔ You don’t have a lot of high-interest debt, like credit card debt.
✔ You need to lower your debt-to-income (DTI) ratio for a big purchase, like a house.
✔ Your car loan interest rate is high.
✔ You’ve already built up a good emergency fund.
✔ You owe more on your car than it’s worth because of a low down payment or high interest rate.
✔ Reducing debt is important for your financial goals, both now and in the future.
FAQ’s
Q1. Is It Worth Paying Off Your Car Loan Early?
Paying off your car loan early can be a great choice for many people. It’s a good option as long as it doesn’t put too much strain on your finances or take money away from more important needs. Before making your decision, consider the pros and cons, any other debts you have, and which method will work best for your situation.
Q2. Is paying off my car loan early bad
Paying off your car loan early can be a smart move if it helps you save on interest and gives you more financial flexibility. However, it may not always be the best choice if it depletes your emergency savings or if you have higher-interest debt to address first. It’s important to consider your overall financial goals, any prepayment penalties, and whether the extra funds could be better used elsewhere.
Q3. Will paying off a car loan increase credit score?
Paying off your car loan may cause a small dip in your credit score initially, usually by a few points, due to changes in your credit mix. However, over time, it can improve your score by reducing your debt-to-income ratio and lowering your overall debt.