What are the Benefits of Paying off a Loan Early?

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - February 8, 2018

There’s only one advantage to early loan payoff when it comes to auto loans – saving money. A borrower can save thousands in interest charges by paying off a loan ahead of schedule.

How Does Early Loan Payment Work?

Pre-payment on an auto loan doesn’t require anything special, and there are several ways to do it. The simplest is to pay more money whenever possible.

By tossing in an extra $20 here and there, or even an extra $100 per month when a budget allows, a borrower can shorten their loan term by months, potentially saving hundreds or thousands in interest charges. Tax time is also a good time to contribute to your early loan payoff – you can use all or part of your refund to help.

If a borrower prefers a steady schedule, a good option is to split monthly payments in half and pay on a bi-weekly schedule. This allows for 13 monthly payments each year, saving big bucks in interest charges. Another way to accomplish pre-payment on a schedule is to round up monthly payments – if your payment is $275 per month, try rounding up to an even $300.

Are There Drawbacks?

The only drawback to early pay off is if there are early payment penalties included in a loan contract. Most auto loans are simple interest loans, meaning interest accrues daily based on the principal balance remaining on the loan. The longer it takes to pay, the more interest accrues, making early payoff a benefit to the borrower.

Rarely, however, lenders use language that imposes penalties in a contract, or loans that aren’t simple interest. Watch for:

  • Pre-payment penalties – When a loan is paid early, a borrower pays a certain percentage of interest on the remaining loan balance.
  • The “rule of 78s” – For these loans, the total amount of principal and interest get calculated upfront, and the borrower agrees to pay the entire amount – no matter how quickly repayment happens. This tactic calculates the interest on a loan and boosts the interest paid up front on a pre-calculated loan. This means lenders apply more of the payment toward interest in the beginning of the loan, and more toward the principal in the end of the loan term. This practice is rare, as well as illegal in a majority of states. In 1992, Federal Law banned this practice on loan terms over 61 months.

It’s important to read all loan documents carefully before signing, and to watch for language that could allude to any payment penalties. It’s best not to sign a document that includes these, and instead ask a lender about a simple interest loan.

The Right Lender for Your Needs

If you’re ready for your next vehicle, make sure you get the right kind of loan from the right kind of lender – one that won’t penalize you if you decide to make your payments ahead of schedule. If a history of credit issues has you wondering if another car is in the cards, don’t fret! The right loan can be a great tool for improving your credit, but you need to know where to turn.

Here at CarsDirect, we work with special finance dealers across the country that have the lending resources available to help people out of challenging credit situations. Don’t hesitate; fill out our no-obligation online auto loan request form today!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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