Once you have a car loan, it’s easy to start dreaming of the day when it will be paid off. Eventually, you’ll see a light at the end of the tunnel and you may want to pay it off early. While there are lots of reasons to consider putting some extra cash toward your debt — such as lowering the interest or to free up some money — it’s not as straightforward as it seems. Look at each of these factors before you make a decision.
Benefits of Early Payoff
Aside from being able to give yourself a pat on the back for paying off a loan, there are several benefits that you should consider. Without a car loan, you can:
- Free up the monthly payments for other purposes.
- Save money on interest, depending on the type of loan.
- Decrease your debt utilization, which may improve your credit.
Paying Off a Car Loan Early
Paying off a loan faster may seem as simple as making a few extra payments per year. In reality, there are a few things you should do first:
- Find out your options. Contact your lender to ask about making additional payments. You may need to specify that you want the extra money to go to the principal. Be sure to keep a record of any extra payments you make, especially if you’re using a different method than the one you use for the monthly payment.
- Set an amount you can afford. If you plan to use extra funds to pay off your loan, be sure to choose an amount that will allow you to pay all your other bills. If you haven’t examined your budget lately, now is a good time to confirm that you’re budgeting enough for necessary expenses.
- Consider saving to make a lump sum payment. You may be able to make extra payments throughout your loan term, but you can also pay off the remainder of the loan in a lump sum. Saving up allows you to control the money until you’re ready to pay it all off.
Things to Consider Before Paying Off a Car Early
Although there are plenty of benefits to an early loan payoff, they aren’t available with every kind of car loan. You may need to look at your loan terms and do a little research to see if any of these apply to you:
- Interest: Some loans calculate interest based on what you owe that month, while others tack on all the interest at the beginning of the loan. An early payoff only saves on interest for the first type, not the second.
- Prepayment Penalties: In some cases, a loan may include penalty fees for paying it off early. If your loan has one, compare this fee against the other benefits to decide if it’s right for you.
- Payoff Amount: Ask about the total payoff amount. If your interest is calculated monthly, you may need to pay extra to account for the interest between the most recent payment and the last one.
- Other Loans: Extra money is always useful, but you may want to confirm that paying off your car loan early is the best choice. You may have other debts with a higher interest rate that would save you more if you paid off those first.
Paying off your car loan before the term ends feels good, but you want to be sure it’s the right choice for you. When you take advantage of JDBNOW’s convenient financing options, you can get a vehicle you need and a clear path to paying it off.