Car Loan Documents with Key

Deer Parkdrivers who choose to finance their new or used car with an auto loan will have a set monthly payment amount that they must stick to in order to pay it off in time. But what if you'd like to pay more than your monthly payment amount? You may be wondering, "Can you pay off a car loan early?" The answer is yes! Paying off a car loan early is a viable option for many La Porte individuals. In this guide, the finance team at Bayway CDJR covers the following topics:

  • How to pay off a car loan early.
  • Is it good to pay off a car loan early?

Get help determining whether you should start working toward the goal of early car loan payoff and explore some tips to help you get there, below!

Is it Good to Pay Off a Car Loan Early?

It takes good financial planning and a lot of thoroughness to pay off a car loan early, but you'll be rewarded with lower interest paid overall, lowering your chances of becoming upside down on your loan, a lower debt-to-income ratio, and you'll be one step closer to financial freedom! 

When To Pay a Car Loan Off Early

  • You're looking to improve your debt-to-income ratio.
  • You have little or no other debts to pay off and would like to get your car loan paid off so you can free up money for other expenses.
  • You are attempting to lower your monthly expenses to plan for a larger financial goal, such as buying a new home or growing your family.
  • You have enough extra funds saved up or more wiggle room in your budget that making larger monthly car payments won't affect your emergency funds and other finances.

When NOT to Pay a Car Loan Off Early

  • You don't have a lot of extra funds set aside for emergencies.
  • Some car loan agreements include prepayment penalties. Before you go and pay off your car loan, double check with your lender, because if this is the case, you would of course want to avoid those penalties.
  • You're using your on-time, set monthly payments to build your credit history or raise your credit score.
  • 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. Sometimes a small interest rate is hard to come by, therefore the money you'd use to pay your loan off early could be better served if you set it aside in a different investment.

How You Can Pay Off Your Car Loan Early at Bayway CDJR

There are a few methods you can follow to pay off your car loan early. Take a look to determine which route makes the most sense for yourself:

  • Round Up Your Payment Each Month - Each time you make a monthly payment, round up the amount to the nearest $50 at least.
  • Make Bi-Weekly Payments - Check with your lender first to ensure it's okay to use this technique; but if it is okay, divide your monthly car payment by two, then make that payment amount every two weeks. Using this method, you will effectively be making 13 full payments per year rather than 12! 
  • 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. However, you should only refinance if it's securing you a lower interest rate. The lower interest rate will lower your monthly payment, making it easier to pay more than what's required each month so you can pay off your loan early.
  • Make One Extra Payment Each Year in One Lump Sum - If you'd rather not round up for each monthly payment using the above method, you can instead choose to make one large extra payment per year to achieve the same interest savings. 
  • Resist the Temptation of Skipping a Payment - This is where some lenders grab your attention- they allow you to skip one or even two car loan payments per year. This may be tempting if you're in the midst of a rough month financially, but it will only lengthen your loan term and tack on more interest.

Learn More with Bayway CDJR!

Is it good to pay off a car loan early? For many Houston drivers, the answer is yes! If you'd like more information on how paying off your car loan earlier than planned can save you money, contact us at Bayway CDJR