How to Pay Off Your Car Loan Early

Updated on April 9, 2024

At a Glance

  • To pay off an auto loan early, set clear goals and create a structured budget.
  • Prioritize extra payments using funds like tax refunds or bonuses and consider refinancing for a lower interest rate. Commitment is key.
  • Alternatively, refinance for better terms, split your monthly payment into biweekly installments, make a significant one-time payment, round up your regular payments, and evaluate and eliminate unnecessary car expenses. The aim is to increase contributions and reduce loan tenure.

In the U.S., the average monthly car payment is a $430, with some car owners shelling out a more than $1,000 dollars a month! This accounts for a large part of many people’s monthly spending, so identifying strategies to speed up one’s car loan repayment may lead to considerable financial savings, irrespective of possessing a favorable auto loan interest rate.

Paying off your car loan beforehand is a significant step toward achieving financial freedom. It requires careful planning and dedication, but the rewards are worthwhile. In this comprehensive guide, we will explore various strategies and tactics to help how you pay off your car loan early and secure a debt-free future.

How to Pay Off an Auto Loan Early

Embarking on the journey to pay off your car loan ahead of schedule is a commendable step toward financial freedom. If you want to pay off your car loan early, you must devise a strategy. This individual adopted a proactive approach and devised a strategy that assisted him in overcoming his debt. Here are a few tips to get you started on your debt-free journey:

  • Setting Clear Goals: Setting a goal is crucial for paying off your auto loan early. Determine how much you want to pay off and set a timeline to motivate yourself. A clear target will help you stay focused and committed to your goal.
  • Creating a Budget: A well-structured budget is the cornerstone of early auto loan repayment. Examine your income and expenses closely. Identify areas where you can reduce unnecessary spending and allocate as much money as possible toward your car loan. While this may require sacrifices in other aspects of your life, the long-term benefits are worth the effort.
  • Leveraging Extra Payments: Besides your regular monthly payments, making extra contributions whenever feasible can significantly expedite your loan payoff. Whether it’s a tax refund, a work bonus, or funds from a successful garage sale, allocate these windfalls to your car loan. Even small additional payments can have a substantial impact in reducing the overall interest you’ll pay.
  • Exploring Refinancing Options: Consider investigating refinancing opportunities to secure a lower interest rate on your auto loan. A reduced interest rate can lead to substantial long-term savings and make early auto loan payoff more attainable.
  • Embrace Discipline and Commitment: It’s essential to acknowledge that early auto loan payoff requires discipline and unwavering commitment. While the journey may not always be easy, the sense of financial freedom and the money saved on interest payments are highly rewarding. Keep your goal in focus, stay motivated, and in due time, you’ll celebrate your debt-free status

5 Ways to Pay Off Your Car Loan Faster

You can take a few different routes to pay off your loan early if you decide to do so. Your current financial condition and your behaviors around money will determine which option is ideal for you.

1. Refinance Your Car Loan

Refinancing auto loans allows you to obtain a new interest rate and loan duration. If you can afford greater payments, you can acquire a refinancing loan with a lower interest rate and a shorter term. A refinance loan, on the other hand, is just a new auto loan for a vehicle that you already own. It may have the same fees and other costs as other loans, so factor these into your calculations.

2. Divide your monthly bill into two biweekly payments.

Making half payments on your car loan every two weeks may appear neutral at first sight. However, instead of 12, this will result in 26 payments over a year. That implies you’ll spend an extra month’s rent each year.

3. Make a Significant Payment

If you have extra money from a job bonus, tax refund, or other source, making a high lump-sum down payment on your auto loan can help you pay it off faster. This is especially true if your lender applies for additional payments above the minimum debt payment to the principal. This will also minimize the interest you will be charged in the future.

4. Round Up Your Automobile Payments

Any extra money you put toward your car loan will help you repay it sooner. Simply rounding up your contribution to the nearest $50 or $100 increment can make a big difference. For example, if your monthly auto loan payment is $365 and you pay $400, you would have contributed $420 to your debt after a year – more than a month’s payment.

5. Examine Any Additional Car Expenses

Your auto loan could be paying for stuff you don’t need. Gap insurance and car warranties are routinely rolled into purchase financing by dealerships. In some situations, canceling your coverage may result in a partial reimbursement, lowering your monthly premium. If you continue making the same payment as before, you will pay off your car loan faster.

Strategies for Accelerating Debt Repayment

Paying off your car loan early requires dedication and discipline. While it may not always be easy, the financial benefits make it worthwhile. In addition to the fundamental strategies, here are some additional tactics to help you accelerate your debt repayment.

Reducing Unnecessary Expenses

Trimming unnecessary expenses is one effective way to expedite your debt repayment journey. Take a moment to evaluate your spending habits and identify areas where you can make adjustments. Do you need that daily fancy coffee or those monthly subscriptions you hardly use? You can free up extra money for your loan by cutting back on non-essential spending. Remember, every dollar saved counts when it comes to paying off debt.

Boosting Your Income

In addition to expense reduction, increasing your income can significantly speed up your debt repayment process. Consider diversifying your income sources by taking on a side hustle, freelancing, starting a small business, or monetizing a hobby. Dedicate the additional income you generate towards making extra payments on your car loan, allowing you to substantially progress in reducing your debt.

Negotiating Lower Interest Rates

Another valuable strategy is negotiating lower interest rates with your lender. Reach out to your lender and inquire about obtaining a reduced interest rate. A simple phone call can save you a large amount of money. Lenders may be willing to work with you to lower your interest rate if you have a strong payment history and a good credit score. Because of this, you can save a significant amount of money throughout the loan.

Staying Motivated

Throughout your debt repayment journey, remaining motivated and focused on your debt-free goal is crucial. Keep your eye on the prize and remind yourself of the benefits you await once you’ve paid off your car loan. Celebrate small victories, such as reaching milestones or paying off a certain percentage of your debt. By acknowledging and celebrating these achievements, you can maintain your motivation and unwavering commitment to your goal.

Pros and Cons of Paying of a Car Loan Early

ConsiderationPros of Paying Off Car Loan EarlyCons of Paying Off Car Loan Early
Interest SavingsSaves money on interest as the interest amount decreases over the loan’s life span. Greater savings with higher interest rates.If the loan has a very low or zero annual percentage rate, there’s minimal benefit to early payoff. Could potentially earn more from investments.
Equity & Asset OwnershipReduces the risk of negative equity. Fully own the vehicle sooner.Paying off can result in a temptation to purchase a new vehicle, possibly incurring higher monthly payments and insurance costs.
Insurance SavingsPotential for reduced insurance costs. No need for certain coverages like gap insurance.
Financial RatiosBetter debt-to-income ratio, improving loan qualification chances.
Monthly BudgetFrees up funds for monthly bills or other financial goals.Paying extra can strain a tight budget, making it difficult to handle emergencies.
Debt ProfileStep closer to being completely debt-free.Paying off can cause a slight dip in credit score due to a reduced credit mix and lack of active installment loan.
Loan Terms & PenaltiesPrepayment penalties might be imposed. The cost might negate interest savings.
Financial PrioritizationOther debts with higher interest rates might be a priority. Contributions to savings or retirement funds could offer more financial and tax benefits.
Emergency FundBefore focusing on early payoff, ensure an adequate emergency fund is in place to handle unexpected financial challenges.

Is Early Loan Payoff a Good Idea?

Paying off a loan early might initially seem advantageous, but several factors should be evaluated to determine if it’s the most beneficial decision for your financial situation.

Review Your Loan Details

Before considering a faster loan payoff, it’s essential to delve into the specifics of your loan. Some financial institutions discourage early car loan settlements because this means they accrue less interest.

To determine the feasibility of early repayment:

  1. Prepayment Penalties: Inquire if your lender imposes penalties for early repayment. Such penalties might negate the potential savings from reduced interest.
  2. Examine Your Outstanding Balance: Familiarize yourself with the remaining amount to gauge the benefit of early repayment.
  3. Direct Extra Payments to Principal: Not all lenders automatically apply additional payments toward reducing the principal. Some might allocate it toward interest or future payments. To ensure you’re truly reducing your debt, specify that your additional contributions are intended solely for the principal. It’s advisable to discuss this with your lender to avoid misunderstandings.

How to Determine Your Potential Savings

Now that you’ve learned how to pay off your car loan early, it’s time to put pen to paper and determine how much you could save. But it’s not just about the numbers; it’s about the possibilities that arise when you free yourself from the burden of a car loan.

Here’s a step-by-step guide to help you assess your potential savings:

1. Gather the Numbers

Start by collecting the necessary financial details:

  • Remaining Loan Balance: Determine the outstanding balance on your car loan.
  • Interest Rate: Note the interest rate associated with your loan.
  • Remaining Loan Term: Find out how many months are left in your loan term.
  • Monthly Payment: Calculate your monthly car payment, including principal and interest.

2. Calculate the Numbers

With these figures, you can calculate the potential savings of paying off your car loan early. Compare your remaining loan balance to the total amount you would pay if you continued with regular monthly payments until the loan’s maturity. The difference represents your potential savings.

3. Visualize the Benefits

However, it’s not just about the numbers; it’s about understanding the real-world impact:

  • Freedom from Monthly Payments: Envision the relief of no longer having that monthly payment burden. This newfound financial freedom can significantly reduce your stress.
  • Unlocking Financial Opportunities: Consider what you could do with the money saved. It might be a well-deserved vacation, a down payment on a new car, or building an emergency fund for future security.
  • Enhanced Financial Flexibility: Early loan repayment grants you financial flexibility. You can focus on long-term goals, such as starting a business, investing in education, or saving for retirement.
  • Positive Credit Implications: Responsible financial behavior, like paying off your car loan early, can boost your credit score. This opens doors to better loan terms and financial opportunities in the future.
  • Peace of Mind: Think about the peace of mind that comes with debt-free—no more concerns about missed payments or the possibility of losing your vehicle.

Consider the Impact of Paying Off a Car Loan Early on Your Credit

The decision to pay off your car loan early can both positively and negatively influence your credit, depending on various factors.

Benefits to Your Credit from Early Loan Payoff

  1. Improved Credit Utilization Ratio: Paying off your car loan can enhance your credit scores by reducing your credit utilization ratio. A reduced debt amount can boost your scores. A low credit utilization ratio indicates responsible management of credit, which lenders appreciate.
  2. Favorable Debt-to-Income (DTI) Ratio: Lenders also consider your debt in relation to your income, known as the debt-to-income (DTI) ratio. This is utilized to gauge your capability to handle new loans. A decrease in debt payments, coupled with a successfully completed installment loan and a consistent on-time payment record, can be advantageous when seeking new financing options, such as a home mortgage.

Potential Drawbacks to Your Credit from Early Loan Payoff

  1. Lack of Diverse Credit Types: Your credit might take a hit if you don’t have another installment loan on your credit report. Lenders generally view active, well-managed credit accounts more favorably than closed ones. Without additional types of installment loans, like mortgages or student loans, your credit mix might be limited. This component contributes to 10% of your FICO credit score.
  2. Payment History Remains: Despite this, the record of your punctual payments persists on your credit reports for up to a decade. Consequently, achieving a high credit score is still feasible, even in the absence of active loan accounts. Moreover, your payment history constitutes 35% of your FICO Score. Thus, even if there’s a minor decline in your credit score due to paying off your car loan, the benefits might outweigh the drawbacks, especially if your loan has a high interest rate.

How to Use a Personal Loan to Pay of a Car Loan Early

Using a personal loan to clear a car loan can be a strategic move, especially if you manage to secure a personal loan with a lower interest rate. Here’s how to navigate this process effectively:

1. Understand Your Current Car Loan Situation:

  • Check the outstanding balance, your current interest rate, and note any prepayment penalties.
  • Estimate the total interest you’ll pay if you continue with the current car loan terms.

2. Research Personal Loans:

  • Look for options with a lower interest rate than your car loan.
  • Examine loan terms to ensure they fit your financial objectives.
  • Be wary of any additional fees like origination charges.

3. Apply and Secure the Personal Loan:

  • Submit the necessary documentation, which typically includes credit history, proof of income, and other relevant information.
  • Once you get the approval, familiarize yourself with the loan amount, its terms, and the associated interest rate.

4. Settle Your Car Loan:

  • You can either have the personal loan provider directly pay off the car loan or do it yourself once you receive the loan amount.
  • Always confirm with your car loan provider that they’ve received the payment and that your account is closed.

5. Manage the Personal Loan Repayment:

  • Establish a monthly repayment schedule. Opt for automatic payments to ensure punctuality.
  • If there’s no prepayment penalty, consider paying more than the minimum due when possible, reducing both interest and the loan’s lifespan.

It’s crucial to ensure that this switch truly benefits you in terms of savings. Assess all fees, interest rates, and terms to make sure you come out ahead. Consulting a financial advisor before making such decisions can also provide clarity and assurance.

Best Personal Loans to Pay Off a Car Loan Early

Paying off a car loan ahead of its term can be a financially liberating move. It not only frees you from monthly obligations but also helps save on interest over the loan’s lifespan. With various lenders in the marketplace, finding the right fit for such a purpose can make a significant difference. Below, we provide insights into some of the best lenders to consider when seeking a personal loan to pay off a car loan early.

AmOne (Best for Okay to Good Credit)

For those whose credit lies in the okay to good range, AmOne offers a reliable option. Their expansive network of lenders ensures a higher probability of finding a loan suited to your specific requirements. With their easy-to-use platform, borrowers can quickly get matched with potential lenders who understand the intent of settling a car loan earlier than scheduled.

AmOne Personal Loan

4.5
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

600

Fixed APR

3.99%-35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 600.
  • Fixed APR: 3.99%-35.99%.
  • Loan amounts: $1,000 to $50,000.
  • Repayment: 1 to 7 years.

Qualifications

  • Must be at least 18 years old.
  • Must be a U.S. citizen or permanent resident.
  • While there’s no specific income requirement, a consistent source of income is essential for the applicant.

Pros

  • Suitable for individuals with lower credit scores.
  • No cost for the matching service.
  • Attractive loan rates.

Cons

  • Acts as an intermediary, not a direct lender.
  • Risk of multiple contacts from prospective lenders.
  • Lack of clarity on lender details.

Spring Loans (Best for Bad Credit and No Credit)

Spring Loans provides a ray of hope for those struggling with poor or non-existent credit. Recognizing that credit scores aren’t the be-all and end-all of financial trustworthiness, they offer loans tailored for those looking to settle car debts ahead of time. Their inclusive approach ensures that a wider range of borrowers has access to suitable refinancing options.

Spring Loans Personal Loan

4.2
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

27.00%

Variable APR

N/A

Overview

  • Minimum credit score: None.
  • Fixed APR: 27.00%
  • Loan amounts: $3,000.
  • Repayment: 48 months.

Qualifications

  • Demonstrate a recurrent income.
  • Minimum age prerequisite: 18 years.
  • Validate U.S. citizenship status with an SSN.
  • Provide a legitimate U.S. driver’s license or a state identity card.
  • Establish a functional bank account for incoming deposits.
  • Adhere to any specific demands by the loan provider.

Pros

  • Open to applicants with any credit background.
  • Four-year loan period aids in structured financial management.
  • The $3,000 offer addresses several short-term financial challenges.
  • Wide-reaching eligibility criteria invite a broad spectrum of applicants.
  • The focus on dependable income over job title benefits varied income sources.

Cons

  • The set 27% APR is higher than many alternatives.
  • Restriction to a $3,000 loan might not cover all financial outlays.
  • Possessing specific IDs is mandatory, sidelining some applicants.
  • A prerequisite for an ongoing bank account may limit certain users.

First Premier Lending (Best for Bad Credit)

For those with a less-than-stellar credit history, First Premier Lending steps up as a formidable option. They take a more holistic view, looking beyond mere credit scores to offer tailored loan solutions. Their understanding approach can assist those aiming to clear off their car loans early and move toward a debt-free future.

First Premier Lending Personal Loan

4.2
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

27.00%

Variable APR

N/A

Overview

  • Minimum credit score: None.
  • Fixed APR: 27.00%.
  • Loan amounts: $3,000.
  • Repayment: 48 months.

Qualifications

  • Maintain a consistent source of income.
  • Must be at least 18 years of age.
  • Possess valid U.S. citizenship and a legitimate social security number.
  • Hold a current U.S. driver’s license or state-issued ID.
  • Keep an active bank account for direct deposit.
  • Satisfy any lender-specific criteria, such as credit rating, borrowing history, or place of residence.

Pros

  • No minimum credit score requirement allows accessibility for those with varied credit histories.
  • 48-month term provides clarity and allows for long-term financial planning.
  • Specific loan amount of $3,000 can meet many short-term financial needs.
  • Broad set of qualifications make the loan accessible to a wide range of people.
  • Emphasis on consistent income, not necessarily employment type, allows flexibility for borrowers.

Cons

  • A fixed APR of 27% is relatively high.
  • Loan amount is capped at $3,000, which might not cater to larger financial requirements.
  • Requirement of a U.S. driver’s license or state-issued ID could exclude some individuals.
  • Mandatory active bank account could be limiting for those who are unbanked.

Upgrade (Best for Good to Great Credit)

Upgrade stands out for borrowers who have maintained good to excellent credit ratings. Their competitive rates and transparent terms make them a top choice for those looking to settle their car debts without any hitches. The streamlined application process and a reputation for fast approvals further add to Upgrade’s appeal for this purpose.

Upgrade Personal Loan

5.0
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

560

Fixed APR

8.49% - 35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 560
  • Fixed APR: 8.49% – 35.99%
  • Loan amounts: $1,000 to $50,000
  • Repayment: 3 to 5 years (7 years on some larger loans)

Qualifications

  • Possess an active bank account.
  • Able to provide a legitimate email address.
  • Minimum age requirement: 18 years (19 for Alabama residents).
  • Credit score of 600 or higher.
  • Annual income of $25,000 or more.

Pros

  • Willing to accommodate borrowers with a credit score as low as 560.
  • Offers flexibility with a range of loan amounts from $1,000 to $50,000. This can be suitable for both small and large financial needs.
  • Provides options for repayment, allowing borrowers to choose a timeline that best suits their financial situation.
  • Once approved, borrowers can access funds in just one day, which is useful for urgent financial needs.

Cons

  • Origination fees can go as high as 9.99%, which might add a significant cost to the loan.
  • Apart from the origination fee, there are fees for late payments and failed payments, which can add up if one is not careful.
  • While there is an option to extend repayment for larger loans up to 7 years, it’s not standard for all loan amounts.

BestEgg (Best for Good Credit)

BestEgg, with its solid reputation in the personal loan sector, is a prime choice for borrowers with good credit scores. Their swift approval process combined with competitive interest rates makes them a preferred lender for individuals aiming to pay off car loans ahead of schedule. Through BestEgg, many have found a simplified and efficient route to becoming car debt-free.

BestEgg Personal Loan

4.5
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

600

Fixed APR

8.99-35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 600.
  • Fixed APR: 8.99-35.99%.
  • Loan amounts: $2,000-$50,000.
  • Repayment: 3 to 5 years.

Qualifications

  • Targets borrowers with good to excellent credit; fair credit may qualify.
  • Minimum credit score of 600.
  • At least two years of credit history.
  • Minimum annual income: $3,500 from various sources like employment, alimony, and more.
  • Debt-to-income ratio: 40%, or 65% when including a mortgage.
  • Must be a U.S. citizen.

Pros

  • Soft credit check available for pre-qualification.
  • Offers a diverse spectrum of loan amounts.
  • Provides options for secured loans.
  • Direct payments can be made to creditors for debt consolidation.
  • Late fees are not charged.

Cons

  • Charges an origination fee.
  • Doesn’t offer rate discounts.
  • Initial payment date isn’t customizable.
  • Lacks a dedicated mobile app for loan management.

Final Thoughts

Paying off your car loan early is a commendable financial achievement with numerous benefits. It not only saves you money on interest but also provides you with the freedom to pursue other financial goals and opportunities. Whether you set clear goals, create a budget, leverage extra payments, or explore refinancing options, the key is to stay disciplined and committed to your debt-free journey. With determination and the right strategies, you can accelerate your debt repayment and enjoy the peace of mind of being financially independent. Your path to a debt-free future begins now.

Paying Off a Car Loan Early FAQ

Below, you will find some commonly asked questions about paying a car loan off early and their answers.

Can I pay off my car loan early without any penalties?

While many car loans allow you to repay early without penalties, some might have prepayment penalties if you pay off the loan before the end of its term. Always check the terms of your loan agreement or consult with your lender to confirm.

Will paying off my car loan early improve my credit score?

In general, paying off a car loan can positively impact your credit score as it reduces your total debt obligation. However, it may also decrease your credit mix (variety of credit types), which is a factor in credit scoring. The net effect on your score will depend on the overall context of your credit profile.

What happens to the interest if I pay off my car loan early?

If your car loan has simple interest, the total interest you pay will reduce if you pay off the loan early. If your loan has precomputed interest, you may still owe the full interest amount regardless of when you pay off the loan. Always check with your lender for specifics.

Should I pay off my car loan early or focus on other debts?

This often depends on the interest rates and balances of your various debts. Generally, it’s a good idea to pay off high-interest debts (like credit card balances) before low-interest, fixed-term loans. However, you should consider your own financial situation and possibly consult a financial advisor.

How do I make an extra payment towards my car loan?

Contact your lender or check your online account. Ensure that the extra payment is applied to the principal balance, not just the next month’s payment, to maximize the benefit of paying early.

Paying more each month reduces the loan balance faster, potentially leading to paying less interest over the life of the loan. Making an extra payment once a year also reduces the balance and total interest paid, but the impact might be less immediate compared to increasing monthly payments.

Can I refinance my car loan to get a better interest rate?

Yes, if you have improved your credit score or if market interest rates have dropped since you took out your original loan, you might qualify for a lower rate by refinancing.

What are the potential disadvantages of paying off my car loan early?

Some potential disadvantages include prepayment penalties, reduced liquidity (if you use a significant portion of savings), and potentially a reduced credit mix on your credit report.

If I sell my car, does that mean my loan is automatically paid off?

No, selling your car doesn’t automatically pay off the loan. If you sell your car for more than the outstanding loan balance, you can use the proceeds to pay off the loan. However, if you owe more on the loan than the car’s sale price, you’ll need to cover the difference.

Can I make bi-weekly payments instead of monthly payments?

This depends on your lender. Some lenders allow bi-weekly payments, which can result in one extra full payment per year, potentially reducing the loan term and total interest paid. Check with your lender to see if this is an option.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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