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Should I Pay Off Car Loan Early?

25
May

Generally speaking, any high APR consumer debts that allow early payment of principal should be done so as long as you can afford it. This includes car loans, unsecured signature loans, credit card balances etc. Of course, check first whether that lender allows it in the first place. If you have a bad credit car loan, the rates are very high so you should make early principal payments whenever you have the spare cash. This means that the amount you owe is reduced, so lesser interest will accrue for the rest of the loan term. You can see how fast you can pay off your car loan using a car payment calculator with early payoff options.

Make sure you have built a sufficiently big cash buffer for at least 6 months of expenses before you use any spare cash for early principal payments. It is more important to avoid late payments which can add more fees and damage your credit. You also want to avoid resorting to short term unsecured loans if you suddenly need extra funds. The best way to avoid getting cash tight is to have sufficient savings. With a good credit score, you can even try to refinance your car loan for even more APR discounts.

For a start, try to pay an extra $100 on top of your usual monthly payment. Note that some lenders do not allow early payments on car loan principal, so you still have to pay the extra interest. Some may charge a prepayment penalty if you want to pay off the loan in one lump sum, which usually applies when doing a refinance.