Paying Off a Car Loan Early
Whenever a Troy driver chooses to finance a new or used car with an auto loan, they have to pay a set monthly payment amount in order to pay it off in time. But is it possible to pay off a car loan early by paying more than the monthly payment? If so, is it good to pay off a car loan early? Keep reading to learn how to pay off a car loan early from the finance team at Mercedes-Benz of Rochester, and about whether or not it’s a good idea for your situation.
Is it Good to Pay Off a Car Loan Early?
Depending on your contract with your Rochester lender, paying off a car loan early can be either a good or bad idea. By doing so with good financial planning and diligence, you can be rewarded with paying lower interest overall and put yourself in a better financial position. Keep reading to see your particular answers to, “Is it good to pay off a car loan early?”
When Paying Off a Car Loan Early Makes Sense
- You have few other debts to pay or none at all. Paying off the car loan would free up money for other expenses.
- There’s wiggle room in your budget, or you have plenty of extra funds saved up. Then, making larger monthly car payments won’t negatively affect your emergency funds or financial situation.
- You are ready to lower your monthly expenses to plan for early retirement or growing your family. By paying off the car loan early, you’ll have one less payment hanging over you.
- You want to improve your debt-to-income ratio to give yourself more wiggle room.
When Paying Off a Car Loan Early Isn’t the Best Option
- You lack emergency funds. The extra cost of paying the car loan off early could put you in a bad situation if you get sick or have another emergency.
- Your interest rate on the loan is exceptionally good. If there won’t be a large financial difference from paying the loan off early, putting the extra money into a retirement fund or a mortgage may be a better financial decision.
- You have a bad credit score, or you want to improve your credit score. Paying on time with set monthly payments helps build your credit history and raise your credit score. Paying off early would reduce that effect.
- Your car loan agreement includes a prepayment penalty. Check your contract carefully to see if this is the case. If you were to have a prepayment penalty, and then you paid off your car loan early, it may actually cost you much more than just paying the loan as scheduled.
How to Pay Off a Car Loan Early
You’ve examined your financial situation, and now you’ve decided to pay off your car loan early so that you can rest easy in Sterling Heights. It’s easy to learn how to pay off a car loan early, and there are a few methods. Take a look and choose a couple from this list:
- Make Bi-Weekly Payments – First, check with your lender and ensure it’s okay to use this technique. Then, divide your monthly car payment by two. Once you do that, make that payment amount every two weeks. If you use this method, you’ll be making 13 full payments per year instead of 12, and you’ll barely notice the difference.
- Round-Up Your Payment Each Month – This one is simple. Round your monthly payment up to the nearest $50, pay that instead.
- Make One Extra Payment Each Year in One Lump Sum – If you’d rather not stretch out your extra payments with the above methods, make one large extra payment per year.
- Resist the Temptation of Skipping a Payment – Some lenders allow you to skip one or even two car loan payments a year, but this is actually worse for you in the long run. It can be tempting if you’re having a rough month, but it will only lengthen the amount of time you’re paying off the loan and increase the amount of interest you’ll have to pay.
- Refinance with a New Car Loan – It’s entirely possible to refinance your vehicle once you’ve made one or two years’ worth of on-time, in-full payments. Only refinance if it’s securing you a lower interest rate, but that lower interest rate will lower your monthly payment, and decrease the total amount of what you’ll have to pay. This will make it easier to pay off your loan early.
The Team at Mercedes-Benz of Rochester Can Tell You More!
If you have any other questions about paying off car loans, feel free to contact us online or stop in at our Rochester Hills dealership. We’ll be happy to help! You can also check our other car buying tips where you can learn things such as how to sell a car at a dealership.