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Buying a vehicle is a big investment, so turning to a loan to pay for a car is common. But while financing your car purchase with an auto loan could transform your total cost into manageable monthly payments, it also means that you end up paying more overall, figuring in interest and fees, than you would if you’d paid for the car up front. Also, the car loan is taking up space in your budget that could go toward credit cards, student loans, or other debt. And it affects your credit rating.It may seem as if the solution is to pay off the loan in full as soon as possible. However, it’s a bit more complicated than that. Learn about the potential benefits and drawbacks of paying down your car loan early, plus 11 useful strategies for doing so.
How Long Are Typical Car Loans?
How long does it take to pay off a car? Three to five year car loans are common. But also people increasingly choose longer term auto loans, with nearly 70 months being common.
Can You Pay Your Car Off Early?
The biggest obstacle to paying off your entire car loan early is if you are stuck with early payment penalties from your lender. Check your loan agreement. You may be charged a certain percentage of your remaining balance if you pay your loan off early.However, even if that’s the case, you can strategize and reduce your payments to get some significant financial benefit.
Pros and Cons of Paying Off a Car Loan Early
Weighing the advantages and disadvantages can be a helpful exercise for any major financial decision.
Pros
Cons
Improves debt-to-income ratio
Possible prepayment penalties
Avoids an upside-down auto loan
Can result in a temporary drop in credit score
Pros of Paying Off a Car Loan Early
There are a number of potential advantages to paying off your auto loan early.
Paying less in interest over the life of the loan. For many, saving on interest payments is a major benefit of settling auto debt.
Improving debt-to-income ratio. Getting out from under a car loan can lower your debt-to-income ratio — a metric lenders use to determine how much you can afford to borrow. That could be an asset if you’re looking to apply for a mortgage or other financing.
Avoiding going upside down on your loan. If you have a high interest rate and lengthy repayment term, you could end up eventually owing more on the vehicle than it’s worth — a scenario known as an upside down auto loan. Paying your loan ahead of schedule could help you avoid this risk.
Cons of Paying Off a Car Loan Early
Depending on your situation and loan terms, there could be downsides to early repayment.
Potential penalties. You could face a prepayment penalty for paying off your loan before its term. Be sure to check your loan contract or speak with the lender to see if you might be subject to such a fee. If so, you may want to compare the penalty fee with the overall savings of paying off the loan early so you can determine whether it’s worth it.
May not be the best use of your funds. Prepaying may take up money that you could have used for paying off higher-interest debt first.
Can impact your credit score. Paying off your loan could result in a temporary drop in your credit score since it reduces the diversity of your overall credit mix.
Learning how to pay off your car loan sooner will help you form your strategy.
Tips to Pay Off a Car Loan Early
1. Review Your Loan Terms
It may have been a while since you were shopping for car loans, so revisiting the terms and conditions is a useful first step as you’re assessing your options for fast repayment. First, you’ll want to check if your auto lender prohibits early repayment entirely. Next, keep an eye out for prepayment penalties, add-on expenses, and the car loan amortization schedule. The last is key to determining how extra payments will be allocated between the loan’s principal, interest, and fees. Since interest builds on the remaining principal, putting extra money specifically toward the principal balance can reduce how much auto loan interest accrues.Finally, you’ll also want to know the interest rate and loan length to calculate how much you’ll save by paying off the loan in advance.
2. Never Skip Payments
Missing an auto loan payment could lead to late fees and accrued interest on the principal, thus increasing the total cost in the long run. To remedy the situation, some lenders may allow you to opt for a loan deferment. However, this extends your loan term, which slows down your efforts to pay off your car loan faster. If you continue to skip payments, your credit score could take a hit and the lender may ultimately repossess the vehicle. Setting up automatic payments can help avoid these outcomes. Recommended: How Late Can You Be on Your Car Payment?
3. Round Up Your Car Loan Payment
Monthly car loan payments are often structured as flat-rate payments for the duration of the loan. Rather than simply paying this minimum monthly amount, rounding up could help you pay off the car loan faster. Depending on your budget, you could increase monthly payments to the next $50 or $100 mark. For example, borrowing $20,000 at a 4% interest rate for 72 months would yield a monthly payment of $313 and $2,536 in interest over the life of the loan. Rounding up each monthly payment to $350 would pay the loan off eight months earlier and save $304 in interest.Escalating payments up to $400 would shorten the loan by 15 months and achieve $559 in savings.
4. Snowball Your Debt Payments
The debt snowball method is a useful way to tackle outstanding debt by focusing on the lowest hanging fruit. Put simply, this strategy involves making minimum payments on all your debt while allocating any leftover funds to the smallest balance. Once that debt is repaid, you move on to the next lowest balance. If you’re able to pay the minimum balance on your other outstanding debt and put any leftover funds toward paying extra on your auto loan, this may help you pay it off faster. But bear in mind that in your overall financial strategy, it can make sense to focus on paying down your highest-interest loans first.
5. Pay Your Loan Twice a Month
If you get paid biweekly, aligning your car loan payments with your paycheck schedule can help you pay off your car loan faster.With this approach, you make biweekly payments that should each equal half the amount due each month. This adds up to 26 payments over the course of the year, meaning you've actually made the equivalent of 13 monthly payments in the year rather than 12.Biweekly payments could also reduce how much car loan interest accrues over the life of the loan.
6. Make Windfall Payments
How about paying extra on your car loan? Well, it can be difficult to figure out how to pay off a car loan faster when your budget is tight.One option is to plan in advance for how you’ll spend unexpected extra money, known as windfalls, that you receive in the future. For instance, you could allocate all or a portion of these funds to a lump sum payment on your auto loan. Some possible examples of windfall payments are a bonus check, tax refund, or inheritance. The average tax refund in 2024 was $3,050, according to the IRS. For most auto loans, this sum could cover several monthly payments.
7. Cancel Unnecessary Auto Services and Warranties
When you purchase a vehicle, it’s not uncommon for your dealer to tack on service contracts and warranties. Depending on the terms of these extras, it may be more cost-effective for you to pay for services, like oil changes or tire rotations, out of pocket. If possible, canceling unnecessary service agreements and warranties could reduce how much you owe and help you pay off the loan sooner.
8. Reduce Other Extra Expenses
Consider examining your discretionary spending to find opportunities for additional savings that could be put toward a higher auto loan payment. For instance, you could cancel underutilized subscriptions or prepare more meals at home.Recommended: 25 Ways to Save Money Fast
9. Earn Additional Income
Rather than dipping into savings or cutting expenses, you could try to make extra money with a side hustle. Some in-demand services include dog walking, pet sitting, and online tutoring.If working extra hours isn’t feasible, you might sell excess belongings like clothes or furniture you don't use. Instead of an old-fashioned yard sale, using apps like Poshmark, LetGo, or OfferUp can expand your pool of potential buyers. You can also make some side-hustle cash with your car, whether it's working for a rideshare app like Lyft or Uber or picking up groceries for Instacart.
10. Transfer the Loan
If you’re having trouble making even basic car payments, the other options may not adequately address how to pay off a car loan quickly. A possible solution to your car debt could be getting someone else to take over your auto loan. Lenders willing to accommodate a transfer may adjust the contract terms for whomever receives the loan transfer. It’s worth noting that this process requires making a title change for the vehicle.
11. Refinance Your Car Loan
Refinancing your car may let you set up smaller monthly payments over an extended term. However, keep in mind that by extending your loan term, you are likely to pay more in interest over the life of the loan. You can also refinance your car to get a lower interest rate and shorten your loan term. This will mean higher monthly payments, but you’ll pay your car off quicker and pay less in interest overall.And if you’re refinancing an auto loan with bad credit, you may still be able to get a new loan, though it can help to get a cosigner with better credit. Whatever makes the most sense for you, it’s essential to find a lender that will meet your needs.
The Takeaway
Learning how to pay off a car loan faster takes research. Putting it into action requires work and discipline. These tips should make it easier to get to the goal for your budget. Whatever makes the most sense for you, it’s essential to find a lender that will meet your needs.Want to learn more about refinancing? Lantern by SoFi can help. Simply fill out an online form to get started.
Frequently Asked Questions
Is paying off a car loan faster always best?
Will your monthly car payments go down if you pay extra?
Does paying off a car completely increase your credit score?
Photo credit: iStock/Pekic
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About the Author
Kevin Brouillard
Kevin Brouillard is a Returned Peace Corps Volunteer, educator, and personal finance writer. His work has appeared in online publications such as Earth Island Journal, Jetsetter, Oyster.com, and Tripsavvy. Kevin covers an array of financial topics for SoFi, including loans for students and small businesses.
