Can I Pay Off My Car Loan Early?

Paying off a car loan early is a great way to save on interest and free your income up for other expenses or goals. Although some loan agreements include prepayment penalties, and you should always review your lending information carefully, most drivers stand to benefit from putting a little bit of extra money toward their loan or paying off the remainder in one lump sum. Learn how to pay off a car loan early and find out how to make the right decision for your finances with the team at Motorwerks BMW in Bloomington, MN.

When Is it Good to Pay Off a Car Loan Early?

If you were to sit down with a financial advisor and ask them, “Is it good to pay off a car loan early?”, they’d almost certainly give you a positive answer! Paying off a car loan early achieves three positive outcomes:

• You’ll lower the total amount of interest paid.
• You’ll minimize the risk of going upside down on your loan.
• You’ll lower your current debt-to-income ratio.

With that said, there are several caveats that you’ll want to be aware of.

When Does Paying Off a Car Loan Early Makes Sense?

Paying off a car loan only makes sense if:

• You won’t face any prepayment penalties, or the total cost of those penalties is less than what you’d otherwise spend on interest.
• Paying off your car loan early will not put undue stress on your finances.

If you don’t have other pressing debts and you want to free up your income for other purposes, contact a representative and talk about paying off your car loan early today.

When Is It Unwise to Pay Off a Car Loan Early?

Paying off a car loan early is not a good idea if:

• You don’t have any money saved up for emergencies.
• You need to make regular payments to improve your credit score.
• You’d spend more on prepayment penalties than you’d otherwise spend on interest.

How to Pay Off a Car Loan Early

There are several ways to pay off a car loan early, but the most obvious method–paying off whatever you still owe in one lump sum–isn’t always achievable for St Paul and Minneapolis drivers. Instead, most owners who want to pay off a car loan early rely on careful planning and budgeting. Simply by paying more than they are strictly required to pay, many drivers find that they can shave at least several months off of their auto loan. Here’s how it’s done:

• Make Bi-Weekly Payments: Not all lenders allow for bi-weekly payments, but if you split your payments in half and pay every two weeks, rather than every month, you’ll make the equivalent of thirteen monthly car payments in a twelve month period.
• Round-Up Your Payment Each Month: Rounding up your payments to the nearest $50 mark allows you to make a bigger dent in the principal with each normal monthly payment.
• Make One Lump Sum Extra Payment: Instead of paying more each month, you can save a little extra money and make two similarly sized payments at the end of the year.
• Resist the Temptation of Skipping a Payment: Some lenders give you the opportunity to skip a payment once or twice per year. Resist the temptation, because in the end, skipping payments only means that you’ll pay more in interest.
• Refinance with a New Car Loan: Even if you can’t pay off your car loan early, you might be able to refinance and secure a lower interest rate–and that means you’ll save on every monthly payment moving forward. Refinancing may be available to drivers who’ve made consistent, on-time payments for a period of two years, but it’s only a good idea if you’ll actually lower your interest rate.

Many of these options work just as well when combined with others. By proceeding carefully, it’s easy to make a significant dent on your auto loan and finish paying well ahead of schedule.

Our Financing Team is Here to Help!

Whether you’re located in Minneapolis or Richfield, our financing team would be happy to help you apply for an auto loan or learn more about your financing options. If you have already financed with us, and you’d like to learn more about your lending agreement, don’t hesitate to reach out!