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Is Paying Off a Car Loan Early a Good Idea?

What you'll learn: Whether or not you should pay your car loan off early


Car loans are the third-largest source of debt for Americans. Of course, paying off a car loan early may seem like a great idea, but there are pros and cons to consider. Take a closer look at both lanes to find out whether an early payoff is your best option.

Advantages of Paying Off a Car Loan Early

There are certainly advantages to paying off your loan early, but it depends on your situation. Here's a rundown of some of the pros.

You Can Save Money on Interest

You've probably heard the sooner you pay off your debt, the less you pay in interest. This is especially true for high-interest debt.

Let's assume you have a loan amount of $20,000 with a rate of 5.00% APR. Here's a snapshot of your estimated savings by adding an extra amount to your monthly payments.


Original Loan

Extra $50 a Month

Extra $100 a Month

Time to Pay Off

5 years

4 years, 5 months

3 years, 11 months

Total Paid




Time Savings


7 months

1 year, 1 month

Amount Saved




As you can see, you could save plenty of time and money. The more you pay each month, the more you save in the long run.

You Can Enjoy More Cash Flow

Once you no longer have a car payment each month, you'll have extra money to put toward other priorities, such as your retirement savings, an education fund for your kids, or paying down other debts.

You Can Feel Better About Having Less Debt

Simply knowing you have less debt can put your mind at ease — a financial and personal perk. Plus, after paying off your loan and closing your account, you won't have to worry about defaulting on your payment. Not only can defaulting hurt your credit score, but it can result in your car being repossessed. Less debt and less worry could equal more peace of mind for you.

You Can Stay on Track vs. Getting Upside Down on Your Loan

When your loan balance is higher than the value of your car, you get "upside down" on your loan. Ideally, you'd pay off your loan before that happens, which is where early payoff comes into play.

If you've gone upside down on your loan, qualifying for a new loan or getting a better interest rate than you originally had may be difficult.

Not sure what the value of your car is? Check it out on Kelley Blue Book.

Disadvantages of Paying Off a Car Loan Early

Taking the cons into account can help you weigh your options. This quick list outlines some possible disadvantages of paying off your loan early.

Prepayment Penalties

Some lenders charge prepayment penalty fees, which could potentially cost you more than what you'd save on interest by paying off your car loan early.

Not all lenders issue prepayment penalties, and there isn't a standard amount charged for them, so make sure you know the terms of your loan before paying it off.

Less Cash Flow Each Month

Putting more money toward your car loan can potentially leave you strapped for cash when it comes to your other monthly expenses. Having a tighter monthly budget can also make you feel stressed about a lack of money for unexpected expenses that might pop up.

Potential Impact on Credit

If you have a mix of installment accounts (car loan) and revolving debt (credit card), paying off your car loan account may slightly — and temporarily — lower your credit score because your credit mix will be less diversified. But keeping one or more accounts open and making payments on time can help you build credit.

Should I Pay Off My Car Loan Early?

Still not sure whether paying off your car loan early is the way to go? Again, it depends on your unique situation, but seeing if any of these scenarios resonate with you might help.

When it Makes Sense

  • Good financial health: Think about whether you have enough money to cover bills, day-to-day expenses, and savings contributions. If paying off your loan early wouldn't interfere with other financial needs, then it might be right for you.
  • Extra funds: Whether you receive a work bonus, tax refund, or some other influx of cash, you could put it toward paying off your loan.

When it Doesn't Make Sense

  • Other higher-interest debts: If you have other debts with higher interest rates than your car loan, such as a credit card or personal loan, you may want to focus on paying those off first.
  • Bigger-picture goals to meet: Going back to your financial health, you might reconsider paying off your car loan early if it would take away from higher-priority financial goals, such as saving for retirement, a college fund for your kids, or your emergency fund.
  • Possible auto refinancing: If you're looking to tackle your other debts first and want to get a lower interest rate on your car loan in the meantime, auto refinancing could be an alternative to paying off your loan.

What is Refinancing?

Refinancing means you replace your existing loan with a new one. Ideally, the new loan will have a better interest rate to help lower your monthly payments. Find out how to refinance your loan.

Refinancing would be more likely to help if:

  • Interest rates are lower now than when you took out your original loan
  • Your credit score is better now than when you took out your original loan
  • Your new loan term isn't longer than your original one, otherwise you'll end up paying more in interest over the life of your loan
  • Potential refinancing fees don't cost more than what you'll save

Also, remember refinancing might not be your best option if you're close to paying off your original loan or if your car has lost value due to age or mileage.

How to Pay Off a Car Loan Early

If paying off your loan early feels right, there are several ways to get started.

  • One lump-sum payment: With this option, the payoff will cover the loan balance, interest through your final day of payment, and any other fees. Contact your lender to calculate the final payoff amount and to make sure you have all the information you need.
  • Bump up your monthly payments: Rounding up your monthly payments to the nearest $50 can help shorten your term. For example, if your monthly payment amount is $268, pay $300 instead.
  • Make half-payments every two weeks: By doing this instead of monthly payments, you'll make an extra full payment throughout the year.
  • Make one bigger, extra payment each year: Making an extra payment that's significantly more than what you usually pay can shave months off your loan. You can make this payment at any point in the year. For example, it might be best to make you big payment when you get a tax refund, birthday money, or a work bonus.
  • Skip out on skipping payments: If your lender allows a skipped payment once a year, give some thought to what that really means. A month without making a car loan payment may seem like a relief, but that payment is simply added to the end of your loan, which means you'll pay more in interest.

FAQs: Paying Off a Car Loan Early

Let's clear up any additional questions you have about early loan payoffs.

You paid off your car loan. Now what?

Your lender will send you the car title or release of lien after receiving your final car loan payment. That makes you the official owner.

Does every loan have a prepayment penalty?

No, certain lenders issue prepayment penalties, but not all of them do. Refer to your loan contract for penalty details specific to your loan.

Will your car insurance expenses be impacted if you pay off your car loan early?

Generally, lenders have certain car insurance requirements, which vary by state. Depending on those requirements, you may be able to keep the coverage as it is or reduce it.

Do extra payments on your car loan go toward the principal?

Extra payments are often applied toward interest or other fees. Contact your lender to specify that you want any extra payments to go toward the principal.

Mapping Out Your Course

Whether paying off a car loan early is the right choice depends on your situation.

If you don't pay off your car early, you can focus on paying down other debts and contributing more to savings. If you do pay off your car early, just make sure you understand the loan terms and potential fees.

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