Early Loan Payoff
Paying off your auto loan early can help you save money in the long run, but before you begin the early loan payoff process, be sure your lender hasn't stuck you with any pre-payment penalties.
What Is an Early Loan Payoff?
For auto loans, an early loan payoff means you pay off your car loan before your auto loan term is up.
For example, if your auto loan term is four years (or 48 months), you might make enough extra payments (or, pay enough extra on your current payments) that you pay off the auto loan several months earlier than scheduled.
Find Your Current Payoff Amount
Early Loan Payoff Calculators
You can find your current auto loan payoff amount using an auto loan calculator designed specifically to calculate your early loan payoff.
The Internet is full of such early loan payoff calculators; most use the following factors to calculate your estimated payoff amount:
- Total number of months in your auto loan term (again, for example, if your auto loan term is for four years, your total number of months is 48).
- Number of months left on your auto loan.
- Auto loan amount.
- Additional monthly payment.
- Current annual interest rate (sometimes referred to as “annual percentage rate" or “APR").
With that information, the early payoff calculator should be able to tell you your current payment and how much time you can save paying off your car loan early.
Your Lender
You can also contact your lender directly to get an estimate of your loan payoff amount. Several lenders will even provide your loan payoff amount as part of their online services.
Pros & Cons of Early Loan Payoffs
Pros
Aside from eventually freeing up some cash each month, there are several pros to early auto loan payoff, including:
- Saving money on monthly interest rates.
- Generally, the earlier you pay off your loan, the fewer months you'll have to pay interest.
- Saving money on car insurance.
- Typically, once you own your car outright, many car insurance companies allow you to drop your comprehensive and collision coverages, and only carry the state's minimum liability insurance requirements. Of course, this is a personal decision, but many drivers save money on car insurance this way.
- Improving your credit score.
- The less debt you have in your credit history, the better. However, note that regular, timely payments also positively affect your credit score, so you might consider waiting a year or two before you begin your early loan payoff.
Cons
Pre-Payment Penalty
All lenders—including banks, credit unions, and dealerships—have their own policies when it comes to paying off car loans early; however, some lenders impose a penalty for early auto loan payoff, which perhaps is the most prevalent disadvantage to paying off your auto loan early.
Ideally, you should ask about this pre-payment penalty up front, before signing any contracts; yet, because many people don't know about pre-payment penalties—or haven't yet planned an early loan payoff—they don't know to ask.
So, if you're considering an early loan payoff, either consult your loan contract and other paperwork or simply contact your lender and ask whether a pre-payment penalty is in place. Once you know, you can determine whether the amount of the pre-payment penalty is worth the money you could save in interest rates and other areas with an early auto loan payoff.
Hidden Contract Stipulations
Be aware that even if they don't impose pre-payment penalties, some loans impose other financial pitfalls for early loan payoff.
For example, your loan contract might be written as a pre-computed loan, meaning you are required to pay the entire amount of the principal and interest—regardless of how quickly you pay off the loan—providing no financial savings for early loan payoffs.
Also, some loans are written such that you must pay off the interest first, before any payment amounts are applied toward the principal. This can prevent you from saving any money on interest rates.
