Paying off a car loan early can save you money — provided the lender doesn't assess too large a prepayment penalty and you don't have other high-interest debt. Even a few extra payments can go a long way to reducing your costs.
Making a full lump sum payment means paying off the entire auto loan at once. Consult your lender to see how much your loan payoff is. This will include the remaining balance including interest and any outstanding fees based on the day you plan on making the payment.
One of the biggest rewards you'll reap by paying off your car loan early is the money you'll save in interest. The longer your loan is open, the more interest you'll pay. As a result, those who pay their car loan off using a lump sum will probably see more savings.
Some may have a prepayment penalty — a fee for paying off a loan early or making extra payments. This is especially common with auto loans that use precomputed interest. On average, the penalty is about 2 percent of your outstanding balance. So if you have $7,000 remaining, you would have to pay $140.
If there are no prepayment penalties, you can pay off a car loan as fast as you want. If you're refinancing, you should wait 60 to 90 days for the title and financing paperwork to be completed for the original loan before you can go forward with the new loan.
Provided the down payment is $5,000, the interest rate is 10%, and the loan length is five years, the monthly payment will be $531.18/month. With a $1,000 down payment and an interest rate of 20% with a five year loan, your monthly payment will be $768.32/month.
Surprisingly, the opposite can occur—paying off a car loan early can cause a dip in your credit score. Fortunately, the impact is usually short-term and may not happen to every consumer. This is because other factors and variables can affect your overall credit score.
There are no legal restrictions to paying off your auto loan early but it may come with fees from your auto loan provider. Paying off a car loan early can be a good option to save money and reduce your debt, but whether it is a good idea depends on your unique financial situation.
Eleven states generally prohibit prepayment penalties on residential first mortgages. These include Alabama, Alaska, Illinois (if the interest rate is over 8%), Iowa, New Jersey, New Mexico, North Carolina (under $100,000), Pennsylvania (under $50,000), South Carolina (under $100,000), Texas, and Vermont.
Your car payment won't go down if you pay extra, but you'll pay the loan off faster. Paying extra can also save you money on interest depending on how soon you pay the loan off and how high your interest rate is.
They stay away from debt.
One of the biggest myths out there is that average millionaires see debt as a tool. Not true. If they want something they can't afford, they save and pay cash for it later. Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary.
An interest rate under 5% is a great rate for a 72-month auto loan. However, the best loan offers are only available to borrowers who have the best credit scores and payment histories.
Key Takeaways
Paying off high-interest debt is likely to provide a better return on your money than almost any investment. If you decide to pay down debt, start with your debts with the highest interest rates and work down from there.
Let your interest rates guide you when deciding in which order to pay down debt. That usually means sending any extra money toward credit card debt first, then personal loans, student loans, car loans and, lastly, your mortgage.
No, it's not a mistake. That's because the difference likely is because of the way the interest of your loan is calculated. Basically, your balance is what you currently owe, and your payoff is what you owe plus interest that accrues from the statement date and a specific payoff date.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
Payments would be around $377 per month. According to the results, it will take you 60 months, an interest rate of 5% of $2,645, to fully pay your $20,000 car loan. However, the monthly cost of a $20,000 car loan will depend on your repayment period and the annual percentage rate (APR).
Splitting the payment in half and paying twice a month (semi-monthly) saves money. Why? On an auto loan, interest compounds daily. By paying half your payment early, you actually cut down the principal faster, thereby reducing the corresponding compounding interest you'll pay over the life of the loan.
Typically, a bank won't finance any vehicle older than ten years, even if a borrower has good credit.
The most likely possible reasons for your credit score dropping after paying off debt are a decrease in the average age of your accounts, a change in the types of credit you have or an increase in your credit utilization.
To reach an 800 credit score, you'll want to demonstrate on-time bill payments, have a healthy mix of credit (meaning accounts other than just credit cards), use a small percentage of your available credit, and limit new credit inquiries.
If you pay off your only active installment loan, it is considered a closed credit account. Having no active installment loans or having only active installment loans with relatively little amounts paid off on those loans can result in a score drop.