Getting a new car can be an exciting thing. While you likely budgeted for your monthly payment, the idea of having no car payment is lovely. You might have a few months left on your loan and feel like making one large payment, but what will happen if you pay your loan off early? The answer might surprise you.
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Reasons to pay off car loan early
Why would someone want to pay off their loan early? Here are a few reasons:
Free up monthly income
A set monthly payment is expected when financing a loan, but it is always nice to free up income by cutting down on payments. Paying your car off earlier than planned can give you extra cash earlier than anticipated.
Boost your credit score
Paying your loan off could give your credit score a boost. A paid-off loan lowers your debt-to-income ratio, making you look more appealing to lenders. As a result, your credit score might dip a bit when the loan is initially paid off, but it’ll bump back up.
Save money on interest
Interest can make your car more expensive over the years, especially if your interest rate is higher. Paying your loan off faster can cut down the interest you owe, helping you pay closer to the principal amount and saving you some money.
Ways to pay off a car loan faster
Paying off your car loan early can be beneficial. This is the best way to get it done quickly.
Round up your payments
Rounding up your payments is a way to pay off your loan faster without making too much of a dent in your pocket. Say your monthly payment is $350. Consider paying $400 monthly, rounding your payment up by $50. You can even do more if you feel up to it. An extra $50 a month in one year is an additional $600 paid toward your loan. That can make a huge difference.
Switch to a biweekly schedule
Paying your loan biweekly instead of monthly may seem silly, but it actually gives you an additional payment a year. Split your payment in half; for example, a $500 payment would be $250 and paid biweekly. This method equals 13 payments a year instead of 12.
Review your contract for hidden fees
Your car loan is a contract, and sometimes contracts can be confusing. Make sure there are no hidden fees or services you did not realize you signed up for and are costing you. If you find something, contact your provider and see whether you can get them removed. Getting additional fees deducted can lower your payment but consider paying the same amount as before, which will ultimately end up as extra payments.
Set aside more money for you car loan payment
You could also use any extra funds toward your car loan payment. For example, if you get extra money for your birthday, pick up extra hours at work, or any additional funds, you can put them toward your loan. It will help you pay it off faster and save you money in the long run. It might seem like a task while it’s happening, but it will be worth it in the end.
Employ a debt repayment method
There are debt repayment methods that help you focus on paying off debt in a strategic way.
The snowball method is a popular debt repayment method that many find helpful. Pay off the smallest first. Then, put all efforts into paying the smallest debt while paying the minimum balances on other debts. Once the smaller debt is paid off, move on to the next using the amount you made on the now paid-off payment plus the minimum. You continue this trend until your debt is all paid off. Many love the snowball method because paying off small debts can be a confidence boost and motivation to continue tackling your debt.
The avalanche method works the opposite of the snowball method. With this method, you start with the largest or highest-interest debt and work your way down. Paying extra toward the most considerable debt first is not only a money saver in the end, but can also be a huge accomplishment. Imagine how great you will feel when you notice your most significant debt has been cleared. You will feel like you can tackle anything.
What happens when you pay off your car?
Congratulations! You paid off your car. Now you are the vehicle owner, so you will receive the title. The title will list you as the official owner of the vehicle. Depending on your state, you might already have the title, but it will likely have the lien holder listed. The lien-holder is the company your auto loan is financed through, so you will need an updated title listing only you as the owner with no lien. Contact your Department of Motor Vehicles if you need an updated title after the loan is paid off. If you don’t receive an updated lien once your loan is paid off, contact your loan servicer to ensure they have released the title.
Pay It Your Way
The best way to pay off a car loan is the way that works best for you. There are many benefits to paying your loan off early, and if you can fit the extra payments into your budget now, you can save money in the long run. Keep in mind that it is not required, but there are methods to accommodate your need should you decide to pay your loan off early, and tackling your debt is the best thing to do right now.
What happens if you pay your car off early?
Paying your car off early can save you money, but you might want to check with your loan provider to ensure there is not a prepayment penalty.
Is it smart to pay off a car loan early?
If there are no additional fees and you can afford to make the additional payments, paying your car loan early can be beneficial for you.
Does it hurt your credit to pay off a loan early?
You could see a drop in your score when you pay off a loan early. Paying your loan off early can change your credit mix, and it shows as a closed account. Both impact your score.