If your car is paid off, you're in a good position to trade it in. You can then use the trade-in value to lower the cost of a new or used car from the same dealership. To get the most from your trade-in, do everything you can to increase your car's value first.
Free up money for other expenses
Paying off your car loan is a big opportunity to progress on other financial goals. If you keep the car you have and don't take out another loan, you can put that money toward vacation savings, retirement funds or other debt.
Often, it's best to pay down or pay off your auto loan before selling it or trading it in. The main concern is whether you have positive or negative equity on your loan. With negative equity, you will always want to pay off your auto loan before you trade in your car.
Once you've made your final payment, you must get the title from your lender to prove you legally own the car. In some states, getting your title is an automatic process after you pay off your loan. In others, you may have to submit paperwork to the Department of Motor Vehicles.
Does paying off a car loan help credit? This can vary from person to person. In the short term, paying off a debt and closing credit accounts can result in a drop in credit scores. But over time, it can improve a person's DTI ratio, which lenders may look at when considering your credit application.
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.
Paying off your auto loan sooner is a good idea if: You don't have a lot of high interest debt, such as credit card debt. You need to lower your debt-to-income (DTI) ratio for a large purchase, such as a new home. Your auto loan interest rate is high.
NerdWallet recommends financing new cars for no more than 60 months and used cars for no more than 36 months. These maximums can help you avoid some of the negative outcomes of long-term loans.
Keep driving it and you save money not only because you don't have to make payments on a new car, but also because car insurance premiums are lower, and in some states, so are registration fees and personal-property taxes.
For most buyers in 2024, new car deals are more sensible due to lower financing costs and attractive incentives. Used car prices are declining but remain high, affected by the pandemic's long-term impact on production.
While paying off your car loan early is typically the best move to reduce your debt and save money, it is not for everyone. If you can't afford to make a larger down payment or pay extra each month it may not be a good idea. Refinancing a car loan can be a better option in this case.
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.
Once you pay off a car loan, you may actually see a small drop in your credit score. However, it's normally temporary if your credit history is in decent shape – it bounces back eventually. The reason your credit score takes a temporary hit in points is that you ended an active credit account.
Americans own their longest-kept cars for an average of about 8 years. In our sample, 64% have only owned their current cars for 5 years or less. 80% of Americans considered cost before buying a new car. Top factors that Americans consider before purchasing a new car are cost, fuel economy, maintenance and performance.
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.
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.
One way to pay off your car loan early is to make one lump payment. Contact your lender to find out your car loan payoff amount and ask how to submit it. The payoff amount includes your loan balance and any interest or fees you owe. You can also pay more than the minimum amount due each month.
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.
When you think about how much you'll owe in interest by the end of your loan term, you might think: “Wait… can I pay off my car loan early to avoid future interest?” The answer is yes. In fact, paying off your car loan before the end of the loan term is a great way to reduce your interest payments!
Paying off your car loan early might save you money by reducing the total loan interest you pay. But if you have other higher-interest debt or no emergency savings, the disadvantages of paying off your car loan early could outweigh the advantages.
While older models of credit scores used to go as high as 900, you can no longer achieve a 900 credit score. The highest score you can receive today is 850. Anything above 800 is considered an excellent credit score.
Consider yourself in “good” shape if your credit score is above the average for people in your age group. Given that the average credit score for people aged 18 to 25 is 679, a score between 679 and 687 (the average for people aged 26 to 41) could be considered “good”.