Paying Off a Car Loan Early: Everything You Need to Know

For most of us, aside from a mortgage, an auto loan will be our most significant outgoing. If you can minimize it or pay it off early, you gain a lot of financial freedom.

 

As long as your auto loan supports early repayment or overpayments, you could save a lot of money. While it isn’t always easy, it is definitely possible with these practical tips!

 

Decide How to Overpay Your Loan Payments

You have a few options when paying off your auto loan early. You can overpay each month, pay a lump sum every now and again or settle the entire loan off with a single payment.

 

Overpaying monthly: If your budget allows, you could overpay your auto loan each month. As long as you specify that the overpayment comes off the principal and not the interest, you will find the term of the loan becomes much shorter.

 

A common way to do this is by rounding up. Say your payment was $425 per month. You could round up to $500 per month and overpay by $75 per month. This could make a big difference to the amount of interest you’ll pay over the term.

 

Pay a lump sum: Some lenders will allow you to pay off a lump sum of the auto loan every now and again. As long as the sum is significant, i.e., a few hundred dollars a time or more, most lenders will accept a lump sum payment.

 

For example, saving up by not going out through winter could save you $500 which you could request to pay off your car loan as a one off payment.

 

Different lenders have different rules about this type of overpayment so check with them first.

 

Settle the auto loan early: Your other option is to save up or use other savings to pay off your auto loan early by settling it. Most lenders will let you do this without a penalty. This will settle the loan and mean you can borrow more for a newer or better car or not have a loan at all.

 

Paying Your Car Loan Early Isn’t Always a Good Idea

Finally, just a quick not about paying off your auto loan early. Depending on your situation, paying a loan off early isn’t always a good idea.

 

If you use credit cards a lot or have student debt, you will be regarded as having high credit utilization. An auto loan, while still debt, is regarded as lower utilization. This low utilization can offset high utilization credit card debt.

 

Confusing we know but some credit bureaus work this way and could penalize you if you’re trying to improve your credit score or plan to get a new auto loan in the near future.

 

If you’re concerned about this or are looking for a great deal on a car loan, we can help.

 

For those of you who know that you have a challenging credit situation, please visit Unique Chrysler where we have a team of credit specialists ready to help you get approved for a car loan today!