Can I Pay Off My Car Loan Early?

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Is it good to pay off a car loan early? Can you pay off a car loan early without penalties? The answer to both questions is usually yes. Paying off a car loan early is a good idea for most South Riding customers. In this helpful guide, the finance team at Mercedes-Benz of Chantilly explains when paying off a car loan early is or isn’t wise—and we also show you what steps you can take to move closer to your goal! Contact us if you have any questions about how to pay off a car loan early. We’re always happy to help.

Is it Good to Pay Off a Car Loan Early?

So, is it good to pay off a car loan early? Yes, but it depends on your financial situation. It also takes a lot of diligence to pay off a car loan early. But, you’ll spend less money on interest, you’ll lessen your chances of becoming upside down on your loan, and you’ll be closer to financial freedom. 

When To Pay Off a Car Loan Early

Paying off a car loan early makes sense if any of these situations apply to you:

  • You have little other debt to take care of and would like to pay your car off to free up money for other expenses.
  • You have ample savings, and making larger monthly car payments won’t negatively affect your emergency funds or other financial goals.
  • You want to lower your monthly expenses to plan for more significant financial goals, like preparing for retirement or buying a house.
  • You want to improve your debt-to-income ratio.

When Paying Off a Car Loan Early May Not Be the Best Option

  • You don’t have extra funds set aside for emergencies. Aim for six months worth of living expenses in your emergency fund.
  • If you have an exceptionally good interest rate, it might be wiser to continue making on-time payments in the stipulated monthly amount. The reason for this is that the money you’d use to pay your car loan off early could be put toward another financial goal.
  • You’re trying to improve your credit score with the regular, on-time payment that you make on your vehicle.
  • Your car loan agreements include prepayment penalties. Check your loan documents. If this is the case, you should avoid those penalties by following your regularly scheduled payment amount. 

How to Pay Off a Car Loan Early

There are a few methods used by drivers who are interested in paying off a car loan early:

  • Make Bi-Weekly Payments – Check with your lender to see if it’s okay to divide your monthly car payment by two, and then make that payment amount bi-weekly. Using this method, you will make 13 full payments every year, rather than 12. 
  • Round Up Your Monthly Payment – Every time you make a monthly payment, round the amount up to the nearest $50 or even $100.
  • Make One Additional Payment Each Year in One Lump Sum – If you don’t want to round up each monthly payment, you can instead make one large extra payment per year to achieve the same result. Some Centerville drivers use their tax refund for this.
  • Don’t Skip a Payment, Even if it’s Allowed – Some lenders allow you to skip one or two car payments per year, especially around the holidays. This might be tempting if you’re in the midst of financial difficulty, but it will only lengthen your loan term, and you’ll be paying more interest.
  • Refinance with a New Car Loan – If you’ve made a couple of years of on-time, in-full payments, you’re probably a good candidate for refinancing. Of course, only do it if you can get a better interest rate. The lower interest rate will lower your monthly car payment, so you can afford to pay more than the minimum requirement each month.

Mercedes-Benz of Chantilly Is Your Best Auto Loan Resource

Now that you know if it’s good to pay off a car loan early, turn to Mercedes-Benz of Chantilly for auto loan financing or questions about car loans. We are conveniently located near Ashburn. Also, if you’re thinking about trading in your car, we can help. Reach out to us today!

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