The most important ones to keep in mind are your financial situation, monthly goals and the cost of the debt. Take your time to research your options to determine the best strategy for you. How We Make Money. Ben Luthi. Written by. Ben Luthi is a personal finance and travel writer who loves helping people learn how to live life more fully. His work has appeared in several publications, including U. News …. Edited By Chelsea Wing.
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Bankrate Logo Insurance Disclosure. Benefits of paying off a car loan early If you can manage it, paying off a car loan in full ahead of schedule can have some big benefits. Read more From Ben. Finance and more. You may also like Why you should avoid an month auto loan. Update your browser.
It appears your web browser is not using JavaScript. Without it, some pages won't work properly. Please adjust the settings in your browser to make sure JavaScript is turned on. Paying off a car loan early can be a great idea. Sometimes it might make sense, and other times there are better ways to spend or save any extra money. Like all major financial decisions, you may want to discuss with a financial professional and weigh the pros and cons of paying off a car loan early before jumping in.
It is possible to pay off your car loan early but check your financing documents first to see if there is a penalty for pre-paying your loan. The first option is to pay the remaining balance of the loan at one time in one lump-sum payment. This can take longer than making one lump sum, but it could be a good choice if you only have a bit of extra income a month to spare for paying off the car loan.
Submitting payments every two weeks on your vehicle instead of monthly can also help you pay off the loan a little earlier. By paying half of your monthly payment every two weeks, you end up making a total of 26 payments per year, which is equivalent to making 13 monthly payments in one year rather than Contact your lender to make sure this is an option and for their assistance in setting it up. Compensation may factor into how and where products appear on our platform and in what order.
But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.
Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can. Maybe you have a little extra cash each month, or you recently came into a large amount of money. Should you use those funds to pay off your car loan early? There are potential benefits, but also some possible drawbacks, to consider when deciding whether to pay off your auto loan ahead of schedule.
Depending on the terms of your loan contract, you might pay less interest if you pay off your principal early. If your car loan is a simple-interest loan, you pay interest based on what you owe at a given time. While there are some good things that come from paying off your car loan early, watch out for the downsides.
Some loan contracts come with prepayment penalties , which means that if you pay your loan off before the term is up, you could face a fee. Keep in mind that many contracts are in place to avoid buyers paying their car loan off incredibly early, like six months after buying. If you pay yours off two years into your loan, for example, you might not face any fees. If you do plan on paying off your car very early, compare the cost of the fee to the overall savings of paying off your loan well before the final date.
If the fee is more than the savings, it might not be worth it. Paying off your car loan early frees up a good chunk of extra cash to keep in your pocket. Which one has the highest interest rate? That way you save more on total interest owed. Any time you pay off a debt, it lowers your total credit mix and open accounts, which can cause a dip in your credit score.
Most of the time, this drop is temporary and you should see a rebound within a few months. Lenders are more concerned that you manage your debts responsibly. Before completely paying off your car loan, review your options to see which one makes the most sense for your financial situation, like:.
This is a big financial decision and you should give it enough careful thought, just like you did when you first got the car loan. Consider paying off your car if:. Not everyone has the financial power to pay off a car loan early. Refinancing your car loan gives you the chance to lower your interest rate and reduce how much interest you pay over the life of the loan.
Dori Zinn has been a personal finance journalist for more than a decade.
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