Paying off your car loan early can really be worth it, especially if you have a high interest rate. The longer you wait to pay off an auto loan, the more it costs you, so doing everything you can to cut down on those costs can benefit you in the long run.
Early Car Loan Payoff Can Save You Money
One of the biggest advantages of paying off your car loan early is that you can save money overall.
All loans come at a price, and interest is the cost of borrowing money. Unfortunately, interest isn't a set fee – your credit score is the biggest factor in determining just how much it's going to cost you to borrow money. The lower your credit score, the higher your interest rate generally is.
When you have a high interest rate, you can save in interest charges by paying off your loan early. Paying ahead of schedule reduces your interest payments because most auto loans use simple interest. This means that interest charges accrue daily based on the total amount of principal (the amount you borrowed not including interest charges) you owe. Therefore, the longer you owe on the loan, the more interest charges can stack up.
One of the most efficient ways to avoid paying too much in interest is to borrow less money. This isn't always the easiest answer, but the more money you can use as a down payment, the less you have to borrow. In fact, putting money down is one of the best things you can do for yourself when it comes to taking out a car loan.
Ways to Pay Off Your Auto Loan Early
Though a substantial down payment can save you money because you’re borrowing less, it can still be a good idea to pay off a loan as quickly as possible if you want to save even more in interest charges.
If you're looking for a way to pay off your loan early, you have some options:
- Split your payment – If you split your monthly payment in half and make a half payment every two weeks, you actually end up making 13 monthly payments in a year instead of 12.
- Make extra payments – Paying extra on your loan outside of your scheduled payments is a great way to take advantage of any extra money that comes your way, such as a tax refund, stimulus check, or an unexpected windfall.
- Round up – Anything helps when you're trying to pay off your auto loan early. If you want to make an extra impact with each payment, round up to the next highest dollar amount you're comfortable with. For example, if your car loan payment is $379, you could make a $400 payment each month, and knock off some of the balance that accrues interest.
Once you decide which method works for you, you can set yourself up to save. The beauty of simple interest auto loans is that there's typically no penalty for prepayment. So, even if you don't choose just one method of early payment to stick to, you can simply make the decision that helps you the most in your situation.
Does it Matter How Early I Pay Off My Car Loan?
In general, if you're prepared to pay your loan off early, there aren't any stipulations on how long it takes you.
Getting the right balance of loan term and monthly payment can really make an impact on your budget, which you should know going into a vehicle financing situation. As a general rule, this is something you should take into account before you sit down with a dealer or lender.
However, as a bad credit borrower, even if you have enough money to pay off your loan quickly, it may be in your best interest to give the loan a little time to work to your advantage. By using that money thoughtfully, you can build your credit score with on-time loan payments for one or two years.
In fact, if you have the funds to do so, you can take out a loan with a shorter term, perhaps only 36 or 48 months. A shorter loan term typically means a higher monthly payment, but it could be worth it if you need to improve your credit score with the car loan.
If you don't have the money to afford a higher monthly payment, a longer loan term could help. Stretching your loan term may be necessary to get into the auto loan you need. But, it's still worth it to aim for early loan payoff to save yourself money in interest charges.
You have to weigh your own risks and benefits when it comes to how early to pay off your loan. If you need to build credit, take it a little slower so you have time to amass a solid payment history, which is key to a better credit score. If you're not as concerned with your credit score and just want to keep your car loan costs low, it's worth it to save on interest charges by paying off your loan ahead of schedule.
No matter how early you pay off your loan, it's a good way to get your credit rolling, and prepare for better rates and terms on your next auto loan.
Build Your Credit With an Auto Loan
If you're trying to build your credit and you need a car loan, we want to help. At Auto Credit Express, we know how difficult it can be for consumers to find a lender that can work with a lower credit score.
We've built a network of special finance dealerships, and we can match you with one near you. Fill out our fast, free, and zero-obligation auto loan request form, and we'll get to work matching you with a local dealer.