It’s not unusual for the finance department at Salt Lake Valley Buick GMC to have customers ask if it’s good to pay off a car loan early. It can be! If you’re interested in paying off a car loan early, you should make sure that doing so won’t cause you to incur any extra fees. There are specific ways to go about paying off a car loan early. Find out more with us, or, if you’re shopping for a car with us, apply for financing with us.
Is it Good to Pay Off a Car Loan Early?
Paying off a car loan early in South Salt Lake or anywhere requires some planning on your part, but it can be worth it because you’ll save money in interest, decrease or eliminate the chance of getting upside-down on your loan, and you’ll lower your debt-to-income ratio, which is great for your credit rating and puts you closer to financial freedom. That said, there are scenarios where paying off a car loan early is a great idea, and other times when it’s not:
When Paying Off a Car Loan Early is a Good Idea
When Paying Off a Car Loan Early Isn’t the Best Option
Keep in mind that what liability insurance covers is the victim of the accident if you’re at fault. It does not cover the driver at fault.
When Paying Off a Car Loan Early is a Good Idea
- You’re not carrying much debt, or the debt you are carrying has lower interest rates than your car loan.
- You’ve saved a nest egg specifically for paying off your car loan and you have plenty of money in your savings account to cover an emergency.
- You are attempting to lower your monthly expenses to plan for a larger financial goal, such as entering retirement or growing your family
- You’re looking to improve your debt-to-income ratio
When Paying Off a Car Loan Early Isn’t the Best Option
- You don’t have much extra funds set aside for emergencies.
- If you have an exceptionally good interest rate, it may be smarter to just continue making on-time payments in the agreed upon monthly amount. The money you’d use to pay your car loan off early could be better used towards higher-interest debts or for building your savings.
- Your credit score needs some help and you’re rebuilding with your on-time monthly payments.
- Some car loan agreements include prepayment penalties. Of course you want to avoid those penalties by adhering to your regularly scheduled payment amount.
Keep in mind that what liability insurance covers is the victim of the accident if you’re at fault. It does not cover the driver at fault.
How to Pay Off a Car Loan Early
There are several ways to pay off a car loan early. With any of these options, check with your lender to make sure they’re within your agreement and won’t lead to penalty fees.
No matter your plans for paying off your car, always resist the temptation to skip a payment. Even though most lenders all one or two skipped payments per year, it’ll just lengthen the time you’re paying off your loan and you’ll pay more interest in the long run.
- Make Bi-Weekly Payments – Divide your monthly car payment by two, then make that payment amount every two weeks. You will be making 13 full payments per year rather than 12.
- Round Up Your Payment Each Month – Round up the amount of your monthly payment to the nearest $50.
- Make One Extra Payment Each Year in One Lump Sum – This method will help you save money on 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 as long as it gets you a lower interest rate.
No matter your plans for paying off your car, always resist the temptation to skip a payment. Even though most lenders all one or two skipped payments per year, it’ll just lengthen the time you’re paying off your loan and you’ll pay more interest in the long run.
Learn More with Salt Lake Valley Buick GMC!
Now that you know how to go about paying off a car loan early, find out more about the car-buying and financing process with our car-buying tips. If you have a leased car and you’re interested in a lease buy-out, we can help with that, too!