Saving on Your Car Loan: How, When and Why You Should Pay Your Auto Loan Off Early

The benefits of paying off your car loan early are simple and compelling: the sooner you pay down your auto loan, the less interest you'll pay in the long run. This is true for anyone who has a simple interest loan (rather than a pre-computed or "Rule of 78s" loan). But the benefits of paying less interest over time don't always outweigh the risks of having less cash in your pocket in the near term.

Consider the following before making an early payment towards your auto loan:

Lump Sum vs. Extra Payments vs. Refinance

You can pay off your car loan early by making one large lump sum for the remainder of your balance (shown on your loan statement as the "auto loan payoff" amount) or by making extra payments each month to reduce the term of your loan. The lump sum method saves you more in interest payments, but making extra payments is easier on your month-to-month budgeting.

As a third option, you can refinance your car loan to a lower interest rate. While this won't let you own your car free and clear, it will close out your previous high interest car loan and save you money in the long run.

Prepayment Penalties

Check with your lender to make sure that you won't be incurring a prepayment penalty for closing out your loan early or making extra payments. Loan prepayment penalties are usually levied as a percentage of your balance. Prepayment penalties are more typical for subprime car loans.

Credit Score Impacts

It's a common misconception that early auto loan payments improve your credit score. In reality, credit bureaus pay closer attention to how long you've had the loan and how often you pay on time. So, it's actually more beneficial to hold on to a car loan for 12 to 24 months and make timely payments than it is to pay it off prior to then, since it gives you a longer credit history.

Early Auto Loan Payoff Examples

Let's say that you took out a 60 month car loan at 9.5% for an original amount of $18,000. If, after 12 months, you decided to pay it off early (presuming no pre-payment penalties), here's what you'd save:



As you can see, the more money you can afford to pay down now, the more you'll save in the long run. Just make sure that you can still meet your other financial obligations and maintain a healthy emergency fund.

MoneyAisle.com allows the once tedious undertaking of finding the best interest rate on car loans and refinanced car loans to become efficient, simple, and organized by putting the entire experience in one online location. Lengthy applications and various credit inquiries are a thing of the past, when one 7-question form accesses MoneyAisle's exclusive network of over 150 financial institutions who bid to give the consumer the best deal. Without any personal information required, consumers are empowered to find the best interest rate hassle-free.