Is it good to pay off a car loan early?

Yes. You’ll pay less in interest, meaning your car will cost less overall. But make sure it’s the right financial decision for you, considering your other obligations. Refinancing may also be a good option if you need to change your car financing situation.

Does paying off a car loan early hurt your credit?

It can depend on your credit mix. If you have numerous credit accounts but your auto loan is your only installment account, your score could see a slight drop because your mix will be less diversified. And if you have high credit card balances or other revolving debt, it may be better to pay that off first, especially if your car loan has a low balance. Overall, your payment history is the most important factor in your credit score, so make sure your on-time payments record is unblemished.

Can you pay off a car loan early without penalty?

Generally speaking, yes. Prepayment penalties vary by lender, and the loan contract should specify if there are any penalties or special procedures for paying off the loan ahead of schedule.

What happens when you pay off a car loan?

You take ownership of the car from the lender. Depending on state regulations, you either receive from the lender a lien release or the title itself; if your state allowed you to hold your title, you would need to have the lien holder’s name taken off once the loan’s been paid in full. You can take the title or the lien release to the DMV to get a new title that’s solely in your name.

Can paying off my car loan early affect my car insurance costs?

Lenders usually have minimum requirements for insurance coverage on your car. When you pay off the loan, you have more options. You can keep your coverage the same or decide to reduce it, by dropping collision or comprehensive coverage, for example. Make sure you follow the requirements for your state.

If my lender offers a skip-a-payment feature, should I consider it?

It may make sense if you have no other options, but you’re not really skipping a payment. Instead, you’re just delaying it — interest still accrues, and the payment is added to the end of the loan.

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Should I Pay Off My Car Loan Early?

Written by

Edited by

Anastasia Economides

Published on: September 13th, 2021

Editorial Note: The content of this article is based on the author's opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.

Paying off your car loan early can be a great idea. For one thing, you’ll save on interest. You also won’t have to worry about car payments after it’s paid off, which can be appealing in uncertain times. If you want to be debt-free, paying off your car is a major step in that direction.

Before you pay off your car, however, make sure you do it in the right way, at the right time.

Pros of paying off a car loan early
Cons of paying off a car loan early
How can you pay off a car loan early?
FAQ: Paying off a car loan early

Pros and cons of paying off your car loan early

Before you pay off your car loan, consider how it would affect your overall finances. Check out these pros and cons:

Pros

You save on interest: With most car loans, the sooner you pay off your loan, the less you pay in interest. The savings can be significant.

You improve monthly cash flow: With your car payment gone, you’ll have more room in your monthly budget. You may be able to invest, pay off other debts or save for some other goal.

You may better qualify for a mortgage. Potential lenders look at your total debt and the percentage of your income spent on monthly payments, known as your debt-to-income ratio (DTI). By having one less debt, you may have an easier time qualifying for credit.

It’s easier to sell your car. It’s simpler to sell your car to a private party when you own it free and clear. You may also want to pay down or pay off your car loan before you sell if you currently owe more than your car is worth.

You’re closer to being debt-free. You may be motivated by setting a goal of paying off a loan. And having fewer debts feels great!

Cons

You may have other, higher interest debt. Car loan interest rates are usually lower than rates on credit cards. To save the most interest expense, pay off higher interest debt first.

Your emergency fund may be too low. Before you pay down debt, be sure to keep adequate cash on hand for car repairs, medical expenses or other unforeseen needs.

It may not be the best move for your credit score. Making payments as agreed over time helps demonstrate you are a good credit risk and can improve your credit score. If you haven’t had the loan long and your credit history is thin, you might want to make payments for a while to build up your score.

You may be subject to prepayment penalties. Some loans, especially those made to customers with lower credit scores, either charge an extra fee when you pay the loan off early, or they charge the entire interest expense amount regardless of when the loan is paid off.

A new car may look tempting when this one’s paid for. Some people pay off one car, and start shopping for the next. You may outweigh the financial benefits of paying off your car if you soon find yourself browsing the new car lots.

How can you pay off your car loan early?

Sure, you’d like to pay off your loan, but what’s the best way? One of the following options may help you reach your goal of having a paid-off car, ahead of schedule:

1. Make a lump-sum payment

Maybe you’ve received a tax refund, inherited cash or a windfall you’d like to put to good use. You may own a savings account, earning an abysmally low interest rate. If you can scrape together enough money to pay off your car loan, you might be able to just pay it off, or at least pay the balance down. Don’t empty your bank account, however. You should always have enough cash on hand for emergencies.

2. Make extra payments on the principal

Making extra loan payments can mean anything from sending a bit extra every month, to making an aggressive effort to pay off your car as quickly as possible. Some people would rather sprint toward a goal and get it over with. For example, you might work extra hours, sell things you don’t need or temporarily give up extras like dining out until the loan is paid off. You decide how hard you want to work, and how fast you want to pay off your debt.

3. Round up your monthly payments

If you can’t afford to pay off your car all at once or pay off your loan very quickly, don’t give up. You can still benefit by putting a little more with your car payment every month. Because every extra dollar reduces the balance on your loan, you start saving on interest expense right away. You could say goodbye to car loan debt a lot sooner than you think.

Here’s an example of how much you’d save by paying just over $100 more each month on a 60-month, $25,000 car loan at 7% interest:

Paying extra on a car loan

	Original 60-month loan	Reduced 48-month loan with extra $104 payment
Monthly payment	$ 495	$ 599
Total interest paid	$4,702	$ 3,736
Amount saved	—	$ 966

You can use LendingTree’s calculator to see how much you need to pay each month to pay off your car loan in various time periods.

FAQ: Paying off a car loan early

Should I pay my car off if I have the money?

Consider paying off your car if you can do so without sacrificing higher priority goals, such as paying down higher interest debt or having an emergency fund. Depending on your balance and interest rate, you may save a significant amount in interest.

Is it better to pay off the car or put money into savings?

Unless your car loan interest rate is very low, you generally save more in interest than you would earn with the same money in savings. This makes paying off the car an attractive option. However, if you wait to pay off all your debts before beginning to save, you may never get started. Consider a balanced approach of working on both goals at once, based on your overall finances.

Is it possible to pay off my loan early without a prepayment penalty?

It depends on your contract. Look at the terms on the loan you signed, or call your lender.

If I pay extra, does the lender apply it to my next payment or use it to reduce my balance?

Be sure to specify that your extra payment should go to the principal. Otherwise, it may go into a suspended account to be applied to future payments. If you want to save in interest, your extra payment must be applied to your balance.

Does paying your car loan early affect your credit?

Paying your loan early may affect your credit and ability to get a loan in a couple of ways. Maintaining an installment loan, and making payments regularly, can improve your credit score.

On the other hand, if you pay off your loan, you’ll lower your debt ratio, which may help you get a loan. And if you’ve been paying on your car loan for a period of time, you won’t lose that positive record of payments on your credit score by paying the loan off.