Should I Pay Off My Car Loan Early?
When car owners are nearing the end of their loan, they might have enough money saved to pay the loan in full. In other situations, a new job or even a tax refund could cause a car owner to use their surplus to pay down or pay off the loan.
Once a car loan is paid in full, the lender’s interest in the vehicle is gone, the car becomes the property of the buyer, and a significant monthly payment is erased. Car owners might wonder, “Should I pay off my car loan early?” What are the benefits and downsides of paying early?
The Benefits of Paying off a Car Loan Early
Paying off a car loan can feel empowering. One debt has been tackled, and the car owner could breathe a huge sigh of relief. Once a loan is paid in full, the lender will provide paperwork that legally removes a lien from the vehicle. Owners will need to keep this paperwork safe; it’s necessary to re-title the vehicle in just the owner’s name or to sell the vehicle.
There are other benefits of paying off a car loan early, including:
- Full ownership of the car
- One less monthly debt
- Car equity (the resale value is now equity)
- The option of electing liability only insurance and lowering that monthly cost
- Freeing up income to pay other debts
Full Ownership of a Vehicle
The most obvious benefit to paying off a car loan is that the car owner is now the sole owner of the vehicle. The lender will release the lien on the car, and the owner can re-title the vehicle in their name.
One Less Monthly Debt
Paying off the car loan means one less monthly debt for a consumer. A paid-in-full loan means no more loan payments!
The Car’s Value Represents Equity
Before a car loan is paid, the value of the vehicle is reduced by what an individual owes a lender. So if the car was wrecked or needed to be sold, the loan debt must be satisfied before the car owner could enjoy any profit.
However, once a car loan is paid, the value of the vehicle belongs only to the car owner. Sell it and keep the profit or trade it in to a dealership without worrying about satisfying a car debt.
The Owner Might Opt for Liability-Only Insurance
In some instances, the car owner could decide to only pay for liability coverage for their car when the loan has been paid. Lenders typically require full coverage on a vehicle to ensure their investment is protected.
Opting for liability-only coverage could be an ill-advised choice if the car has a high value. If the owner is at-fault in an accident, liability-only coverage will not cover their car. Before downgrading insurance, talk to an insurance rep and do the research.
The Zebra explains that coverage options may come down to personal preferences.
Paying off a Car Loan Frees Up Income
When a car loan is paid in full, the car owner will eliminate a monthly expense. Some buyers could free up hundreds of dollars once their car loan is paid. This savings could be allocated to help pay down other debts—especially high-interest loans or debts.
Paying off a car loan not only could reduce monthly expenses but it also could help an individual tackle more debts, too.
The Downsides of Paying Off a Car Loan Early
Paying off a car loan early offers many benefits for car owners. However, there also could be downsides to paying off that loan. These include:
- A high payoff amount that crunches the savings
- Extra fees or penalties for early payoff
- Ignoring higher interest debts
Paying off the Loan Hurts Financial Health
Paying off a car loan early might seem alluring to car owners who simply want to get out from under that monthly obligation. They might look at their savings or a large tax refund and see the extra money as a pay-off solution to their car payment.
Before car owners make that large payment, though, they need to understand how allocating that amount of money would impact their financial health. If the payoff amount is from a savings account, would the withdrawal affect the individual having enough savings to weather a job loss or some other financial emergency?
Understand the impact of paying off the loan. Car owners also could consider making larger monthly payments to help decrease their balance and pay off the loan sooner. However, car owners should contact their lender to discuss how to mark larger payments to ensure they are allocated towards the principal.
Paying Off the Loan Early Means Extra Fees
In some cases, there are extra fees or charges when a car loan is paid earlier than the scheduled payoff date. Chase notes that these fees could actually be more expensive than paying the loan as scheduled, because the fees could be more than the allocated interest.
When a car owner is interested in paying off their loan early, they should contact their lender and request the payoff amount. They also should inquire about any fees associated with paying off the loan early. Understand the price of the payoff compared to the costs of continuing to make payments.
The Car Loan Isn’t the Highest-Interest Loan
Car loan interest rates vary. If the car owner has a low interest rate or even a 0 percent interest rate, they might consider paying the loan in full is the best allocation of their financial resources.
Does the individual have high-interest debts like credit cards that have high monthly payments? Paying these down could make a bigger dent and save more money in the long run.
However, how individuals pay off their debts is a personal consideration. Some prefer to pay the smaller debt first to fully eliminate a monthly payment. Others, though, decide to incrementally tackle the higher-interest debt.
Car owners can look at their own finances to best determine the right course of action regarding debt payments.
Should Car Owners Pay their Car Loan Early?
There is no single right or wrong answer regarding if an individual should pay off their car loan before the original payoff date. Car owners might review their finances to better determine if paying off the loan early is a good decision for their lifestyle.
In addition, car owners also should talk with their lender to better understand the payoff amount and determine if any extra charges or fees will be applicable for an early payoff. In some cases, it might be cheaper to continue to pay the loan as scheduled.
Car owners also might want to determine how paying off their loan would impact their financial health. Would that payoff cause the individual to struggle if they allocated a large payment to satisfy the loan?
For some individuals, an early payoff is the best and most financially astute decision. Paying off the loan early means they will own their vehicle. The lien will be removed, and they can re-title their vehicle. The vehicle’s resale value also will represent equity to the owner.
In addition, an early payoff also could allow the owner to downgrade their insurance (they should research the pros and cons of this, though). Perhaps the largest benefit of paying off the vehicle is that a monthly debt has been eliminated and the owner can allocate those funds towards paying off another debt or even use the savings to help build up a financial nest egg.