Should I Pay Off My Car Loan Early?: Pros and Cons (2024) (2024)

Typically it is a good idea to pay off your car loan early if you have solid personal finances or if you are looking at making a significant purchase in the near future. However, this is not always the case and lenders may have barriers for doing so. Below, we’ll explain when it’s a good call and when it isn’t in the sections below.

When Should I Pay off My Auto Loan Early?

Below are explanations of the situations when you should consider paying off your auto loan early.

You’re Already Financially Secure

If you’ve got no outstanding debt and have plenty of cash on hand, it’s a great idea to pay off your car loan early. The main reason people maintain auto loans is because they cannot afford to purchase their vehicles outright.

If you’ve got plenty of money to fully buy your car, strongly consider covering the loan balance. That way, you’ll stop paying hundreds or thousands of dollars in interest to borrow cash that you already have. There’s little reason to maintain an auto loan if your other debts are completely paid off and you’re in a solid financial situation.

You’re Making a Big Purchase Soon

Cars aren’t exactly cheap, but they’re pretty affordable compared to purchasing a house. Mortgage rates, or the interest you’ll pay when borrowing for a house, are far lower for those with a low debt-to-income ratio. You could save considerable sums if you pay off your car loan early and eliminate other current debts.

You may qualify for a significantly reduced mortgage rate if you have no other debts, which could save you thousands over time. It’s often worth paying off a car loan early before buying a house, as you could get a much more competitive rate on the bigger purchase ahead.

When Should I Not Pay off My Auto Loan Early?

If you’re not sure when to refinance a car, know that it’s often a not good choice if you can’t currently afford to place a sizable amount of money toward your car loan. Also, if your lender has prepayment penalties on your loan you’ll end up paying more than the loan is worth if you make extra payments.

When considering paying off your auto loan early it is good to be aware of the pros and cons of this decision. Below we will break down the most important benefits and drawbacks of early payoff of a car loan.

Benefits of Paying off a Car Loan Early

When you pay off a car loan early, you’ll tap into benefits like these:

Enjoy Full Ownership of Your Car

Even apart from the finances, it’s a good feeling to take ownership of your vehicle. There’s nobody that can repossess your car for missed car loan payments once it’s in your name, since it doesn’t belong to a lender or bank anymore.

You’ll also gain the entire trade-in value of your vehicle if you decide to sell it. Additionally, car owners get to pick their own insurance coverage limits instead of selecting whichever amount their lender requires them to maintain.

Save Money on Interest

When you take out a car loan, you’ll need to pay off the principal along with interest and fees. While the principal is just your originally borrowed amount, interest refers to the cost of borrowing money for your car.

Borrowing money isn’t cheap, so you’ll likely end up paying thousands on top of your principal to get and maintain a car loan. While the best auto loans can help motorists attain vehicles they otherwise couldn’t afford to drive, they come with long-term costs in the form of interest.

Those who pay off a car loan early will no longer be charged interest on their vehicle. Once the car title is in your name, that will free up money that was formerly being spent on interest. This extra cash could be used to help you to reach your financial goals, set up an emergency fund or cover some of the remaining balance on personal loans or student loans.

Avoid Being Upside Down on a Car Loan

Drivers with long-term auto loans run the risk of owing more on their vehicle than it’s worth. This is known as being “upside down” on a car loan, and it’s a terrible situation to find yourself in. One simple way to avoid having negative equity on your vehicle is to pay off a car loan early, reducing the term of your loan.

Reduce Your Overall Debts

It’s almost always wise to reduce your debt-to-income (DTI) ratio, which compares the amount of debt you owe with the amount of money coming into your bank account. Generally speaking, those with a low DTI ratio will have an easier time getting approved for new loans, credit cards and home mortgages.

If you pay off your auto loan early, you’ll gain a lower DTI ratio and you could increase your trustworthiness in the eyes of banks and other lenders.

Disadvantages of Paying Off a Car Loan Early

In a few instances, it may be better to refinance an auto loan rather than to pay off a car loan early. Consider the following downsides before deciding to pay off the rest of your auto loan:

Less Money for Other Expenses

Drivers who are feeling cash-strapped may opt to spend their money on essential goods and services instead. While it feels nice to pay off a car loan early, it’s not worth it if there are more pressing priorities on hand that require the cash.

Try to cover whichever debt payments have the highest interest rates first. That way, you’ll spend less money paying down your debt in the long run.

Penalties for Early Payment

It may sound strange to be punished for paying off debts before they’re due, but that sometimes occurs with auto loans. Prepayment penalties are fees that drivers get charged for eliminating their debts early, removing the extra payments that the lender expected to receive.

Not all loan contracts mention prepayment penalties, but some do. If your current loan comes with a steep prepayment penalty, it’s likely better to pay off your vehicle on its normal schedule.

Reduces Your Credit Mix

Sometimes, it’s helpful to maintain a car loan to prove that you’re reliable at paying off debts. This is generally the case for people who are still attempting to build up their credit history.

It’s possible that your credit score could dip right after you pay off a car loan early. That’s because 10% of your FICO report is based on your credit mix, or the diversity of credit types that you maintain. For most people, this slight drop will be short-lived and can be avoided by learning how to improve your credit score.

There’s no set way to pay off a car loan early, so you’ll have choices when deciding how to do so. The easiest way is to cover the entire cost in one lump sum. While this allows you to immediately remove the auto loan from your debts, it’s expensive and out of reach for many.

Luckily, there are plenty of options for affordable early payoff of an auto loan:

• Shift to biweekly payments: Drivers can cover a sizable portion of their car loan in a single installment or shift to biweekly payments rather than monthly ones. You’ll still have some interest debt left to deal with, but it’ll be much less than if you remained on the original timetable.
• Increase monthly payments: You can lessen your auto loan debt by increasing monthly payments to close out the loan early that you can afford.
• Refinancing: You can pay less each month but put in additional payments over the long term by refinancing. Increasing the life of the loan but receiving a lower interest rate is commonly the goal of auto refinance.

Source: Capital One

While paying off your car loan early is typically the best move to reduce your debt and save money, it is not for everyone. If you can’t afford to make a larger down payment or pay extra each month it may not be a good idea. Refinancing a car loan can be a better option in this case. Regardless, we recommend comparing multiple options to find the most suitable decision for your unique situation.

Our Recommendations for Auto Refinancing

Below is a quick roundup of some of the industry’s best auto refinancing options.

Auto Approve: Top Choice for Refinancing

Starting annual percentage rate (APR): 2.94%
Loan amounts: $5,000 to $85,000
Loan terms: 12 to 84 months

Those looking to refinance their vehicles should take a close look at Auto Approve, which specializes in the process. It has APRs that start at 2.94%, which is a rate that’s typically competitive with industry peers. Drivers seem pleased with the refinancing process through Auto Approve, as the company earns 4.7 stars out of 5.0 out of more than 2,300 reviews on Google.

Keep reading: Auto Approve review

MyAutoloan: Best Low-Rate Option

Starting APR: 4.49%
Loan amounts: $5,000 minimum
Loan terms: 24 to 72 months

MyAutoloan is a popular provider with flexible loan amounts and strong scores for customer service. Motorists give it an impressive 4.2-star rating out of 5.0 from more than 800 reviews on Trustpilot. MyAutoloan’s starting APRs generally hold up well among auto refinancers, though it’s smart to compare potential rates from other options.

Keep reading: MyAutoloan review

Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.

In this article, we selected companies with high overall ratings and cost ratings. The cost ratings were informed by starting APR and loan amounts.

*Data accurate at time of publication.