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Can I Pay Off My Car Loan Early?

Hands Holding Car and Money

When you finance your car with an auto loan in Louisville, KY, you have a monthly amount that you must pay in order to pay off the loan in time. But, if you decide to pay more than your monthly payment amount, you can end up paying off the loan early and owning the title to your car before the set financing period runs out. This is a perfectly viable option for many drivers if they have the means. Don Franklin Auto’s finance center has everything you need to understand these topics:

  • When paying off a car loan early is or isn’t a good idea for you
  • How to pay off a car loan early

Paying off a loan early isn’t for everyone, so be sure to read this guide carefully and consider your individual situation before making any decisions.

Is it Good to Pay Off a Car Loan Early?

As stated above, Russell Springs, KY drivers will want to carefully consider their financial situation before committing to paying off a car loan early. It takes a lot of diligent financial planning to pay more than the set amount each month, particularly if you find yourself on a budget. However, if you are able to pay more than your monthly amount, you’ll have lower interest and a lower debt-to-income ratio, and you’ll be closer to financial freedom! Read on to learn when it’s a good idea to pay off your car loan early, and when you may want to reconsider.

When Paying Off a Car Loan Early Makes Sense

  • You have few other debts to take care of, and paying off your car loan early would free up money for other expenses.
  • You have enough extra funds saved up, so making larger monthly car payments won’t affect your other finances or emergency funds.
  • You have a larger financial goal that you want to plan for by lowering your monthly car payments, such as a retirement fund.
  • You want to improve your debt-to-income ratio.

When Paying Off a Car Loan Early Isn’t the Best Option

  • You don’t have many extra funds set aside for emergencies.
  • If you have a good interest rate, it might be a better idea to continue making on-time payments rather than trying to pay extra. You can put aside the money you would have spent paying off the car loan early for something like a retirement or family fund.
  • You’re using your set monthly payments to build your credit history or improve your credit score.
  • Some car loan agreements include prepayment penalties. Be sure to check your individual agreement to see if this is the case. If it is, you could actually be penalized for trying to pay off your loan early.

How to Pay Off a Car Loan Early

If you’ve decided that you’re in a good position to pay off your car loan early, there are a few different routes you can take. Take a look below to determine which works best for you:

  • Make Bi-Weekly Payments – Check with your lender first to ensure it’s okay to use this technique; divide your monthly car payment by two, then make that payment amount every two weeks. Using this method, you will effectively be making 13 full payments per year rather than 12. You can calculate bi-weekly payments right from our website!
  • Round Up Your Payment Each Month – When it’s time to make a monthly payment, round up the amount to the nearest $50 so you’re paying a bit more each month.
  • Make One Extra Payment Each Year in One Lump Sum – If you’d rather not round up each month, you can instead choose to make a large extra payment each year to achieve the same interest savings.
  • Resist the Temptation of Skipping a Payment – Your lender might be okay with you skipping one or two car loan payments a year, which is an attractive option if you’re in a difficult financial situation. However, it will also add more interest to your payments and lengthen the term so you’ll end up paying money for a longer period of time.
  • Refinance with a New Car Loan – You can sometimes refinance your loan if you’ve made one or two full years’ worth of on-time payments. Make sure you only do this if it gets you a lower interest rate, which in turn will lower your monthly payments.

Learn More with Don Franklin Auto!

Is it good to pay off a car loan early in Somerset, KY? If you’re in good financial standing and you have the means, the answer is yes! If you’re interested in learning even more about the financing process, feel free to contact our office anytime.

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