Paying off your auto loan early may be easy, but is it the right decision? While it may feel good to get that car loan out of the way, you have to look at the entire picture, or you might risk putting yourself in a tight financial spot. We’re going to outline some reasons for and against paying off your loan early to help you determine if this is a viable option.
Pros
Saves Interest
When you pay off the principal on your loan, you’re decreasing the amount of money you owe. This causes your monthly payments as well as the payable interest to decrease.
Free up Money
If paying down your auto loan early leaves you with extra cash each month, you could put some of that money toward paying off your mortgage or student loans, or you could build up a savings account to cover unexpected expenses.
Your Outstanding Loan Won’t Exceed the Car’s Value
If you let your car loan term extend too long, you might find yourself owing more towards the car than it’s worth. Popularly known as being “upside down on your car loan,” this can be an expensive and risky situation to find yourself in. That’s why paying off your car loan early can help protect you from this danger.
Cons
Possible Prepayment Penalty
If you pay off your car loan in advance, check to see whether you have to pay a prepayment penalty fee. The prepayment penalty may outweigh the benefits of paying off your car loan early.
Ignoring Other Debts
Take a look at your other debts, like credit cards and personal loans. Compare the rates you pay on those to the APR of your auto loan. If any of these other balances have a higher APR, you may want to pay them off first.
Won’t Count Toward Your Credit Score
Paying bills on time and in full is an important factor that affects your credit score. Keeping your car loan accounts open, as opposed to paying them off and closing them, could be a better option because your payments are more likely to appear on your credit reports if you are consistent.
