Paying Off a Car Loan Early

Hands Holding Car and Money

Is it good to pay off a car loan early? In many cases, yes, paying off a car loan early is a smart financial move for Kyle-area drivers like you. However, this is only true if you have the means to do so. Find out how to pay off a car loan early and what situations might prompt larger payments in this guide from the finance team at Sterling Acura of Austin.

Is it Good to Pay Off a Car Loan Early?

When you decide to pay off your car loan early, you’ll earn benefits like lower interest paid overall, a lower debt-to-income ratio, and ultimately total ownership of your vehicle. However, it takes solid planning and diligence to go about smartly paying off a car loan early.

When to Pay Off Your Car Loan Early

  • You have little to no other debts to pay down, and you wish to move on from your car loan for financial freedom.
  • You have adequate savings and/or enough flexibility in your budget to account for larger monthly auto payments. 
  • Your goal is to lower monthly expenses overall to work toward something else, like buying a home or entering retirement.
  • You want to reduce your debt-to-income ratio.

When Not to Pay Off Your Car Loan Early

  • You have little to no savings, without funds set aside for emergencies.
  • Your interest rate is already strong, so it’s smarter to continue making payments as specified in the loan agreement and save the money you’d pay over that amount instead.
  • You are building your credit history or working to raise your credit score via on-time monthly car payments.
  • Your loan agreement entails penalties for paying over the monthly payment amount or paying off the car loan early.

How to Pay Off a Car Loan Early

Unsure how to pay off a car loan early? Here are some tips on ways that you can begin to make extra payments on your vehicle. Make sure to check with your lender ahead of time before employing any of these methods.

  • Make Bi-Weekly Payments: Divide your monthly car payment in half, and pay that amount every two weeks. This results in 13 full payments over the course of the year instead of 12 payments when paying monthly.
  • Round Up Your Monthly Payments: Round up to the nearest $50 mark each month to chip away at the total loan amount.
  • Make One Extra Payment Each Year in One Lump Sum: If you’d rather, use an annual bonus or save up money throughout the year to make a lump-sum payment each year to achieve some interest savings.
  • Avoid Skipping Payments: Although some lenders allow you to skip payments in certain circumstances, do not succumb to the temptation. Skipping a payment will only lengthen your loan term and increase your overall interest paid.
  • Refinance Your Car Loan: After a couple years of on-time, in-full payments, you may be eligible for refinancing. Only refinance if it secures you a lower interest rate. The lower interest rate translates to a lower monthly payment, making it easier to pay more than what is required every month. You can then pay off your car loan early.

Get More Car Loan Advice at Sterling Acura of Austin

For many San Marcos-area drivers, paying off a car loan early makes financial sense. If you have any questions about how to pay off a car loan early or need more car loan advice, get in touch with Sterling Acura of Austin. We’re always happy to provide car buying tips you can trust!

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