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LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

Should I Pay Off My Car Loan Early?

Updated on:
Content was accurate at the time of publication.

If you’re looking to put debt in your rearview mirror, you might be wondering, “Should I pay off my car loan early?” Paying off your car before your loan term ends may be wise — especially if you have a high interest rate. But this tactic might not be the best choice if that money could be better spent elsewhere. Learn when it does (and doesn’t) make sense to pay off your car loan early.

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Who should consider paying off their car loan early?

  • If you have a high interest rate: According to Experian data, the average interest rate for a used car was 11.17% in the first quarter of 2023. Borrowers with low credit scores can expect even higher interest rates — an average of 21.32% for borrowers with scores below 500. If you have a high interest rate, you could save a substantial amount of money by paying your car loan off early because you’ll make fewer interest payments.
  • If you’ve received a windfall: If you’ve been given an unexpected lump sum of money (an inheritance or bonus, for example), it could be a good idea to put it toward your car loan.
  • If you’re planning on a big purchase: Ditching your monthly payments by paying your car off can free up funds for another high-dollar item or investment.
  • If you’ve experienced an increase in income: If you’ve recently gotten a raise, congratulations! But beware the dreaded lifestyle creep — you could put that pay bump to good use by paying more than the minimum on your monthly car payments.

If you decide to pay your car off early, be sure that whatever you pay above your minimum amount due goes toward the principal on your car loan, not just the interest.

Pros to paying off your car loan early

Here’s how you might benefit by paying off your loan early:

 Save money on interest

One of the biggest rewards you’ll reap by paying off your car loan early is the money you’ll save in interest. The longer your loan is open, the more interest you’ll pay. As a result, those who pay their car loan off using a lump sum will probably see more savings. Still, paying a bit more than your minimum amount due can have a big impact.

Imagine you have a $30,000 auto loan with a 60-month loan term at 7% interest. Your current monthly payment is $594.04 a month. You have 40 months remaining on your loan term and decide that, from now on, you’re going to pay an extra $100 a month over your minimum monthly payment. If you do, you’ll shorten your loan term by six months and save $420.16 in interest.

 Personal satisfaction of full ownership

When you’re still making payments, your lender owns your vehicle. Once it’s paid off, you’ll receive the title and the car will become your property.

 More wiggle room in your budget

According to LendingTree’s 2023 auto loan statistics, the average car payment in America is $725 a month. From home improvements to saving for your kids’ future, freeing up an extra $725 a month opens a ton of possibilities.

 Improved debt-to-income ratio

Your debt-to-income ratio is a measure of the amount of money you bring in versus the total amount of your debt. By paying off your car loan in full, you’ll reduce your debt load and in turn, lower your debt-to-income (DTI) ratio.

Creditors typically view those with a low DTI ratio as more creditworthy, as it indicates responsible borrowing. This could lead to an easier time opening a new credit card or personal loan in the future.

 No more risk of an upside-down car loan

Over the last few years, used cars have sometimes cost more than new. However, the market is beginning to stabilize. In May 2023, The U.S. Bureau of Labor Statistics Consumer Price Index showed that prices for used cars and trucks fell by 4.2%.

If you financed a used car while prices were high, you might find yourself with an upside-down car loan (or owing more on your car than what it’s worth). Even under normal market conditions, car depreciation can lead to an upside-down loan. By paying your car loan off, you eliminate this risk.

 More freedom with insurance choices

When you’re financing a car, you’re typically required to carry full insurance coverage. Those who lease their cars are usually required to carry higher liability limits, too, as a stipulation of their contract.

After you pay your car off or buy out your lease, you have the option to reduce your level of insurance coverage, potentially resulting in substantial savings.

A word of caution, though — carrying minimum coverage comes with risk. If you don’t have full coverage and you’re at fault in an accident, you’ll have to pay out of pocket to repair or replace your vehicle. The same is true if you decrease your liability coverage and the damage or injuries you cause exceeds what you carry on your policy.

Before making any changes, be sure to speak with a licensed insurance agent.

 Streamlined process if you decide to sell or trade in your car

It can be a pain to sell a car when you still have a loan. Before you can transfer the title to the new owner, you need access to the title. In other words, you’ll need to pay off your vehicle first, either with the proceeds of the sale or by some other means. By owning your car free and clear, you’ll have the title in hand when you want to sell, making the entire process much simpler.

Cons to paying off your car loan early

You might also find some drawbacks to paying off your car loan early, including:

 Prepayment penalties

Some lenders charge a fee for repaying your loan in full before the end of the term, especially those that issue auto loans for bad credit. This is called a prepayment penalty.

If this applies to your loan, crunch the numbers and see how much you’ll be penalized for paying early. If you’ll be facing a lot of expensive fees, then paying your loan early may not be worth it.

 Could see a temporary dip in your credit score

Your credit score is calculated using a number of factors, including your credit mix. Generally, borrowers who have multiple types of debt have a better credit mix than those with only one or two kinds of debt.

If you only have one auto loan and you close it by paying it off early, your credit score might take a dip due a change in your credit mix. Annoying? Yes. But thankfully, as long as you continue to pay your other debts on time, your credit score should rebound fairly quickly.

 May be more advantageous to pay off other debt

There is good debt and bad debt. Generally speaking, cars purchased with a large down payment and with a short-term car loan are considered to be good debt. That’s because large down payments usually mean lower interest rates. Further, a shorter loan term means you’ll pay less in interest over the life of the loan.

If your car loan falls into the good debt category, you might want to hang tight and instead pay off any high-interest bad debt you have, like credit cards or payday loans.

 Could cause financial strain

Depending on how much you owe and your current financial situation, paying off your car loan early might cause undue hardship. If paying off your car loan would deplete your savings, it’s probably better to build your emergency fund or pay off debt instead.

Strategies for paying off a car loan early

Paying your car loan off faster can pay dividends. Here are a few ways to go about it:

Make a lump sum payment

 Best for: People who have received a windfall or just don’t like carrying debt

Some people hate having any sort of debt hanging over their heads. If this is you (and you have the money to do it), paying off your car in a lump sum could provide a sense of security.

To pay your car off in one fell swoop, call your lender and ask for your payoff balance. You may also be able to find it online by logging into your account. 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.

Pay more than the minimum payment each month

 Best for: People who have recently received a raise

If you can’t pay off your car loan with a single lump sum, you can still save in interest over time by paying more than the minimum amount due each month. Create a budget to determine how much you can safely tack on to your monthly car payment without falling behind in other areas.

Make a payment every two weeks

 Best for: People who don’t mind the extra time it takes to make more than one monthly payment

You can save a chunk of change by paying on your car loan every two weeks, rather than monthly. With this strategy, you’ll end up making 13 payments a year rather than 12, speeding up your repayment and reducing the amount you pay in interest.

However, not all lenders accept biweekly payments. If your lender does, you’ll need to make the payments manually or set up automatic bill pay through your bank. This can be a hassle for some, especially if you’re already juggling multiple bills.

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