Prepayment penalties The lender earns money on the interest you pay on your loan each month. Repaying an early loan usually means you won't pay more interest, but there could be an early payment fee. The cost of those charges may be higher than the interest you'll pay on the rest of the loan. Some loan agreements include prepayment penalties, meaning that if you cancel your loan before the end of the term, you could face a fee.
Prepayment penalties and account closures can affect your finances. While speeding up your auto loan payments has its advantages, there are also some potential downsides to consider. If you ever need to turn around and sell it, you could earn more from that sale than you would if you still had a loan, since the lender will wait for the sale to be paid first. However, you'll need to read your car loan agreement or contact your lender to see if this applies to you.
If your loan includes this fee, consider whether the financial benefits of paying off your car loan early outweigh the cost of this fee. While paying off an auto loan can save you money and eliminate a monthly payment, it could also affect your cash flow, and paying off other high-interest debts first could ultimately save you more interest. You should usually pay off your car loan early if you don't have other high-interest debts or pressing expenses to worry about. This could put you in a difficult situation if, for example, your car breaks down or you get a surprise bill for a root canal treatment.
Each payment on an auto loan goes not only to the original amount of the loan (your principal), but also to your interest rate. In addition, taking out a loan to pay for your car means that, if you don't make a payment or are late, the bank or lender can repossess your car. Paying your loan early means that you'll eventually free up your monthly cash for other expenses when the loan is paid off. Refinancing your car loan provides you with an opportunity to lower your interest rate and reduce the amount of interest you pay over the life of the loan.
Under the terms of your loan agreement, you may pay less interest if you pay off principal early. If you received a big bonus at work or a tax refund, or if you have money saved up, you may want to make a one-time payment to pay off your car loan in full. But what if you have an auto loan with a 0% interest rate? It might make sense to continue making loan payments, since eliminating debt will not result in net savings. Early repayment of an auto loan depends on your budget, the interest rate on the loan, and your other financial goals.
Making at least one additional payment on your loan each month, or adding more money to your monthly payment, can help you pay off your car loan early.
