Should You Pay Off Your Car Loan Early?

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - September 21, 2018

If a borrower has the choice to pay off their car loan early, there are advantages and disadvantages to consider. Because everyone’s financial and credit situation is different, paying off an auto loan early may work better for those who are in a more comfortable financial position compared to borrowers who are struggling with budget issues.

Benefits of Paying Early

There are several advantages to paying off a car loan early:

  • Save on Interest Charges: There’s no denying that interest on a car loan adds up quickly. One of the benefits of paying off a loan early is saving on the interest charges paid over the loan term. For example, interest charges on a 60-month, $10,000 loan with a 14.99 percent interest rate come to $4,271. In this example, a borrower could decrease the interest charges by $1,074.84 over the loan term by simply adding $50 to each monthly payment.
  • Less Debt: Lenders look at a potential borrower’s debt to income (DTI) ratio to determine their level of disposable income. If the borrower’s debt is too high compared to their income, it could be difficult getting approved for more credit. Paying off a current loan reduces a borrower’s DTI ratio, making it easier to get approved for additional credit.

When ‘Paid in Full’ Puts You at a Disadvantage

On the other hand, borrowers should consider these drawbacks to paying off an auto loan early:

  • Less Money in Savings: If a borrower is stretching their budget too far and putting too much additional money toward paying off a loan, they could end up with less of a savings cushion. Life is unpredictable, and not being prepared with a large enough emergency fund can be risky for borrowers on a tight budget.
  • Can Affect Your Credit Score: One thing you may not realize is that paying off a car loan early can affect your credit score. When you pay off a car loan, it becomes closed and is listed as "paid in full" on your credit reports. Depending on how early you pay off the car loan, you could see a drop in your credit score. The reason why is because you affect your credit history, types of credit being used, and amounts owed. All together, that’s 55 percent of your FICO credit score. But the good news is that your score won’t stay down for long if you plan on financing another car loan or decide to open new lines of credit.

It Pays to Pay Attention

Paying off a loan early isn’t for everyone. There are pros and cons to paying off your car loan early, and, ultimately, it’s up to the borrower to decide if doing this is the right move for them financially.

If you need a vehicle, but you’re struggling with credit issues, CarsDirect wants to help. Let us guide you toward a local special finance dealership from our nationwide network dealers with the lending sources that are able to handle a broad range of credit situations. To get started, simply fill out our no-obligation, free auto loan request form online.

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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