Paying Off Your Car Loan Early: Benefits, Risks and Strategies
If you’re looking to put debt in your rearview mirror, you might be thinking about getting rid of your car loan sooner rather than later. It’s not a bad idea — you can save money by paying off your car loan early. But it’s not the best choice for everyone, especially if you don’t have an emergency fund.
- You can pay less interest if you pay your car off ahead of schedule, but make sure to tell the lender to put the extra toward your principal.
- Some car loans have a prepayment penalty, which is a fee for making extra loan payments. This is rare.
- You should have three to six months’ worth of living expenses saved in an emergency fund before making extra loan payments.
Should I pay off my car loan early?
Paying your car loan off faster is a great idea — on paper. It’s not always the right choice for everyone.
Might be a good idea if…
- You bought your car when rates were at their highest
- You received a raise or a windfall, like a bonus or inheritance
- You have three to six months’ worth of living expenses saved
- You’ve improved your credit score and can get a low rate on refinancing
- You’re working on a plan to be debt-free
Might be a bad idea if…
- You don’t have an emergency fund
- Your car loan has a prepayment penalty
- You have other higher interest debt to tackle
- You have a reasonable car loan rate and are trying to build credit
- Your job feels unstable
Benefits of paying off your car loan early
You can pay less interest
Paying off your car loan early can help you save. The longer it takes you to pay off your loan, the more total interest you’ll pay. To illustrate this, imagine you have a $41,720 car loan with a 6.73% rate and 69-month* loan term. These are the most recent new car loan averages reported by Experian in its Q1 2025 State of the Automotive Finance Market report.
Then, check out the table below to see how making extra payments can affect your car loan. These scenarios don’t include dealer fees, taxes or registration costs.
| Monthly payment | How long until paid off | Interest paid | Total amount paid | |
|---|---|---|---|---|
| Scenario 1: Minimum monthly payments | $730.83 | 69 months | $8,707.07 | $50,427.07 |
| Scenario 2: Pay an extra $100 per month | $830.83 | 60 months | $7,417.07 | $49,137.07 |
| Scenario 3: Make double payments | $1,461.66 | 37 months | $3,875.07 | $45,595.07 |
*Rounded up to the highest whole number.
Less risk of an upside-down car loan
An upside-down car loan is when you owe more than what your car is worth. This can happen if you make a small down payment, through car depreciation or if you bought your car when prices were at their all-time high.
The more of your loan you pay off, the less upside down you’ll be.
Could free up money for saving
The average car payment in the U.S. is $742 per month, as of the fourth quarter of 2024. Once you pay off your car loan, that money can start going to an emergency fund.
If you already have an emergency fund (which should include three to six months’ worth of living expenses), consider putting extra into a high-yield savings account. You’re already used to making a car payment. Instead of paying a lender, pay yourself instead.
Improved debt-to-income ratio
Your debt-to-income ratio (DTI) compares how much money you earn versus how much you owe. As you pay down your car loan, your debt goes down (assuming you aren’t borrowing elsewhere).
When it comes to DTI, lower is generally better. Ideally, you want a DTI below 35%, but 36% to 41% can be fine, too. Higher than that and you might have a hard time getting approved for a credit card or personal loan in the future.
Can help you pay less for car insurance
You usually need to carry comprehensive and collision coverage when you’re financing a car. If you’re leasing, your contract probably requires high liability limits, too (100/300/50). These all increase your premium.
Once you pay off your car, you can carry whatever car insurance coverage you’d like, as long as it meets your state’s minimum requirements.
If you’re planning on removing full coverage after paying off your car, consider keeping the comprehensive coverage. It’s usually pretty cheap, and you’ll have protection for things outside of your control, like hitting animals, theft, vandalism and windshield chips.
Get some advice from your agent before changing your policy. Also, shop around with different car insurance companies. Rates change all the time. A company that used to be expensive might now be the cheapest, even if your information has stayed the same.
— Carol Pope, Senior staff writer and licensed car insurance agent
Easier to sell or trade in your car
It’s possible to sell a car with a loan, but it can be hard — you can’t get the title unless the car is paid off. A dealer can help you with this, and may even roll your old loan into your new one so you don’t have to pay out of pocket.
A private party, on the other hand, might not feel comfortable handing over cash without a title. Instead, you will probably need to work with both your lender and the private buyer to complete the sale.
Disadvantages of paying off your car loan early
Prepayment penalties
The faster you pay off your car, the less interest you’ll pay. This cuts into the lender’s profit, so some charge a prepayment penalty. These aren’t too common, but be extra wary if you have a bad credit car loan.
Check your contract to check for a prepayment penalty. If your loan has one, do some math to find out how much you’ll really save by paying ahead of time.
| Loan balance | Interest rate | Time left on loan | Overall interest left on loan | Prepayment penalty | Cost of prepayment penalty |
|---|---|---|---|---|---|
| $15,000 | 8.00% | 12 months | $657.92 | 2% | $300 |
In the example above, you’d save $657 in interest if you paid off your car with a $15,000 lump sum. However, $300 of that would go toward your prepayment penalty, leaving you with just $357 of savings. Do you want to let go of that much money to save $357?
Might save more by focusing on higher-interest debt
The average credit card interest rate is 24.28%, according to a LendingTree study. Unless your car rate is higher, you might want to prioritize your credit card debt. Paying off your debt in order of highest interest to least is a budgeting method called the debt avalanche. It can help you pay less interest over time.
Could see a temporary dip in credit score
Your credit mix makes up 10% of your credit score. This measures how many different types of loans and credit cards you have. If you only have one auto loan, your credit score could take a dip when you pay it off. You’ll have one less type of loan in your credit mix.
If your auto loan is one of your oldest accounts, paying it off can also hurt. The length of your credit history makes up 15% of your score.
Get your own credit report card for free with LendingTree Spring. We’ll show you how you’re doing on each of the factors that affect your credit, like payment history and credit utilization. Plus, we’ll give you personalized recommendations on how to improve your score.
Could cause financial strain
Make sure you have an emergency fund before you pay ahead. Imagine you paid $5,000 to finally pay off your car. Would you regret that decision if you lost your job a few months later?
Might be smarter to invest the money instead
It depends on your portfolio, but the S&P 500 has an average rate of return of about 11%. If your car loan rate is lower than that, consider investing the extra money instead. The difference between your car loan rate and the rate of your investment is a gain for you.
Strategies for paying off a car loan early
Make sure to tell your lender that you want your extra payments to be applied to your principal. Some lenders do this automatically, but others will apply it to interest first unless you tell them otherwise. Then, you can:
Round up your monthly payments
People who have recently received a raise
If you can’t pay off your car loan with a lump sum, you can still save money on interest by paying more than the minimum amount due each month. Create a budget to see how much you can safely tack on to your monthly car payment without falling behind in other areas.
Pay twice a month
People who get paid every two weeks
If you get biweekly paychecks, you could make a car payment every time you get paid. Your lender might let you set up an automatic withdrawal twice a month. If not, you will need to make the second payment manually or set up bill pay through your bank.
Make a lump sum payment
People who have received a windfall or don’t like carrying debt
Some people hate having any sort of debt hanging over their head. Paying off your car in a lump sum could provide a sense of security.
To do this, call your lender and ask for your payoff balance. This figure is not the same as your loan balance, as it takes into account any applicable fees and calculates your interest up to a certain date.
Refinance your car
People who have improved their credit score since buying their car
You’re technically paying the loan off early when you refinance a car. In this process, you’ll get a new loan (your refinance loan) and use it to pay off your current car loan. Since this is a totally new loan, you can choose a shorter term. The lender will also run a hard credit check and re-evaluate your rate.
Here’s how it could work. You have 36 months left on your current 60-month loan, but you know you can pay it off in 24. You’ve made all your payments on time and have been working on improving since buying your car. You also think you qualify for a lower interest rate.
In that case, it could be a good idea to consider refinancing. You will pay your car off faster (24 months instead of 36) and save money with a better rate.
Compare auto refinance rates from top lenders in minutes
Frequently asked questions
It can be smart to pay off your car loan early, but it depends. Building three to six months’ worth of living expenses in an emergency fund should come first. Then, you might want to pay off your credit cards because they probably carry higher interest.
It’s better to keep your money in savings if you don’t have a healthy emergency fund, which should cover at least three months of living expenses.
Your credit score could have dropped because of a change in your credit mix. This makes up 10% of your credit score and measures how many types of credit you have. If the auto loan you paid off was the only one you had, that’s one less type of loan in your name.
The length of your credit history also makes up part of your credit score (15%). If your car loan was your oldest account, paying it off could hurt your score.
Each lender sets their own prepayment penalties, so you’ll need to check your contract. You might not have a prepayment penalty at all — not all lenders charge them.
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