Thinking about paying off your car loan ahead of time? While that's easier said than done, early payoff carries some serious financial benefits for you. For most borrowers, it's the smart thing to do.
Save on interest
The most obvious reason to pay off your loan early is to pay less interest. What you pay in interest each month is based on your outstanding balance. The less you owe, the lower the interest charge will be. You don't have to pay off the loan completely to get this benefit. You can start saving immediately by making an extra principal payment each month.
You can go another route and pay off your loan using a home equity loan. Although this doesn't reduce your overall debt, the interest rates on home loan are generally lower, and in most cases the interest you pay is tax-deductible.
Improve your credit score
Reducing your total debt obligation can have a positive effect on your credit score, which will make it easier for you to qualify for a car loan in the future. Note that making on-time payments helps your score as well, so you'll see steady improvement as you work up to paying off the loan completely.
Balance your budget
Without a car payment, you'll have greater cash flow every month. You can breathe easier knowing there will be more money available for unexpected expenses. You can also start saving for your next car or other major purchase.
Lower your insurance premiums
Lenders require that borrowers carry a certain level of comprehensive and collision coverage on their vehicles. Once a loan is paid off and the lender is out of the picture, you are free to drop any required coverage. State minimums still apply of course, but you could save hundreds every year by going with liability coverage only. Just be aware that you won't be covered for damage to your vehicle if you're at fault.