Paying Off a Car Loan Early
If you have chosen to finance a new or used vehicle in Visalia you will have an auto loan with a set monthly payment amount. If you are interested in how to pay off a car loan early, and is it good to pay off a car loan early, there are various options. It can, in fact, be beneficial for many Clovis individuals.
The finance team at Western Motors Fresno has put together this guide covering the following topics:
- Is it good to pay off a car loan early?
- How to pay off a car loan early
Explore some tips below to determine if paying off your car loan early is a good financial move!
Is it Good to Pay Off a Car Loan Early?
Paying off a car loan early requires due diligence in terms of research and financial planning. In turn, you’ll have a lower overall interest amount, and decrease the chance of going upside down on your loan. You can also decrease your debt-to-income ratio and move forward into financial freedom.
Paying Off Car Loan Early: When it’s a YES
- If you are looking to free up money for other expenses AND you have little to no other debts.
- If you have extra funds saved up or enough wiggle room in your budget that making larger monthly car payments won’t affect your emergency funds and other finances.
- If you want to decrease your monthly expenses to plan for a larger financial goal, e.g. retirement or growing your family
- You’re looking to improve your debt-to-income ratio
Paying Off Car Loan Early: When it’s a NO
- You don’t have extra funds set aside for emergencies, or not very much
- If you have a great interest rate, it could be beneficial to continue making on-time payments in the agreed-upon monthly amount. This can work toward improving your credit score, and the money you’d use to pay your loan off early could be better served if you set it aside for a future financial goal.
- You’re using your on-time, set monthly payments to build your credit history or raise your credit score
- Some car loan agreements include prepayment penalties. This you’ll have to confirm with your lender.
How to Pay Off a Car Loan Early
There are a few ways you can go about this process. Here is how to pay off a car loan early:
- Make Bi-Weekly Payments – Check with your lender first to ensure it’s okay to use this technique; divide your monthly car payment by two, then make that payment amount every two weeks. Using this method, you will effectively be making 13 full payments per year rather than 12.
- Round-Up Your Payment Each Month – Each time you make a monthly payment, round up the amount to the nearest $50.
- Make One Extra Payment Each Year in One Lump Sum – If you’d rather not round-up for each monthly payment using the above method, you can instead choose to make one large extra payment per year to achieve the same interest savings.
- Resist the Temptation of Skipping a Payment – Believe it or not, some lenders allow you to skip one or even two car loan payments per year. This may be tempting if you’re in the midst of a rough month financially, but it will only lengthen your loan term and tack on more interest.
- Refinance with a New Car Loan – Once you’ve made one or two years’ worth of on-time, in-full payments, you might be a good candidate for refinancing. Of course, you should only refinance if it’s securing you a lower interest rate. The lower interest rate will lower your monthly payment, making it easier to pay more than what’s required each month so you can pay off your loan early.
Chat with Experts at Western Motors Fresno to Learn More!
Is it good to pay off a car loan early? For many Madera drivers, this could be a beneficial financial move! If you are interested in learning more about paying off a car loan early, contact us at Western Motors Fresno. We’re always happy to provide car buying tips you can trust, and our finance team can help direct you to the best course of action.
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