Want to Pay Off Car Loan Early? Here’s how.

Want to pay off car loan early but not sure where to start? We hear you, and it’s true, it can feel like a challenge. But here’s the key: tackling your car loan faster saves money in the long run. It’s more than just eliminating debt quickly; it’s about taking charge of your financial future.

Many of us have been there, and we know the incredible feeling of making that final payment and truly owning your car. So, how can we work together to shave years off your car loan repayment? It’s all about smart strategies that put money back in your pocket faster, steadily moving you towards financial freedom. Trust us, your future selves will be incredibly grateful for taking these steps today for how to pay off car loan early.

Understand Your Car Loan Terms

Before accelerating your auto loan payoff, take a deep dive into the specifics of your loan. Gather your loan paperwork and meticulously examine the details. Here’s what to focus on:

  • Interest Rate: This determines how much you’ll pay on top of the principal amount you borrowed. A lower interest rate translates to more savings when you pay off the loan early.
  • Repayment Period: This is the length of time you have to repay the loan in full. A shorter repayment period usually means higher monthly payments but less overall interest paid.
  • Prepayment Penalties: Some loan agreements penalize borrowers for paying off the loan early. Check if there’s a prepayment penalty and factor it into your decision-making process.

Many of us can relate – sometimes the excitement of driving a new car overshadows the loan terms. Don’t make the same mistake! Take the time to fully understand every aspect of your loan. It’ll save you future headaches (and money) in the long run.

Know Your Interest Rate

Your interest rate is the biggest factor in how much you’ll end up paying over the life of your loan. The higher the rate, the more you’ll shell out in interest. According to a study by Experian, the average interest rate for a new car loan is 4.33%. But if you have less-than-stellar credit, you could be looking at rates as high as 14% or more.

Check for Prepayment Penalties

Some lenders will charge you a fee if you pay off your loan early. Why? Because they’re losing out on all that sweet, sweet interest they would’ve collected over the life of the loan. These penalties can be a flat fee or a percentage of your remaining balance. And they can add up to hundreds or even thousands of dollars. Before you make any extra payments, double-check your loan terms to see if you’ll be penalized. If so, it might not be worth it to pay off early.

Check the Amortization Schedule to Calculate Your Savings

Now that you know your loan terms inside and out, it’s time to crunch some numbers. Grab a calculator (or fire up a spreadsheet if you’re feeling fancy) and let’s figure out how much you could save by paying off your car loan early.

Use an Online Calculator

There are tons of free online calculators that can help you see how much you’ll save by making extra payments or paying off your loan early. One of my favorites is the Bankrate Early Loan Payoff Calculator. Just plug in your loan details, and it’ll show you how much you can save money on interest by making extra payments or paying off your loan in full. For example, let’s say you have a $20,000 car loan with a 5% interest rate and a 5-year term. If you pay an extra $100 per month, you’ll save $1,162 in interest and pay off your loan 16 months early. Not too shabby.

Do the Math Yourself

If you’re more of a DIY type, you can also calculate your savings the old-fashioned way with a pen and paper (or a spreadsheet). Here’s the formula:

  • Remaining balance x (Interest rate / 12) = Monthly interest
  • Extra payment – Monthly interest = Amount applied to principal
  • Remaining balance – Amount applied to principal = New remaining balance

Repeat this calculation for each month until your remaining balance hits zero. Then add up all the interest you paid along the way. That’s how much you’ll save by paying off early. It’s a bit more work than using an online calculator, but it’ll give you a better understanding of how the numbers break down.

Make a Plan to Pay Off Early

Alright, you’ve done the math and you know how much you could save by paying off your car loan early. Now it’s time to make a plan and put it into action. First things first, set a realistic target date for when you want to have your loan paid off. Be ambitious, but don’t overextend yourself. You don’t want to put so much toward your car payment that you can’t afford your other bills or have to skimp on essentials like food and gas. Set your target date a few months before the actual payoff date. That way, if something comes up and  you can’t make my extra payments for a month or two, you’ve still got some wiggle room.

Make a Budget

Next, take a hard look at your budget and see where you can free up some extra cash to put toward your car payment. Maybe you can cut back on eating out or cancel that gym membership you never use. Every little bit helps. There are many apps that can help track your spending and find areas where you can cut back. It’s helped me find hundreds of dollars in “extra” money each month that you can put toward your car loan.

Set Up Automatic Payments

Once you’ve got your budget sorted, set up automatic payments for your car loan. This way, you’ll never forget to make a payment or be tempted to spend the money on something else. Most lenders will let you set up automatic payments through their online portal. If not, you can usually set it up through your bank’s bill pay feature. You should set up an automatic payment for a few days after you paycheck hits my account. That way, you know the money will always be there and  you don’t have to worry about overdrafting.

Prioritize Debt Repayment

If “pay off car loan early” is high on your to-do list, you need to make it a top priority in your financial life. That means putting your extra money toward your car payment before anything else – even if you have other debts like credit cards or student loans.

The Debt Snowball Method

One popular strategy for prioritizing debt repayment is the debt snowball method. Here’s how it works:

  1. List out all your debts from smallest to largest (ignore interest rates)
  2. Make the minimum payment on all your debts except the smallest one
  3. Put as much extra money as possible toward your smallest debt until it’s paid off
  4. Once that debt is gone, take the money you were putting toward it and apply it to your next smallest debt
  5. Rinse and repeat until all your debts are paid off

The idea behind the debt snowball is that you’ll get quick wins by paying off your smallest debts first, which will give you the motivation to keep going. Some people use this method to pay off their car loan, and it works out well. Seeing those smaller balances disappear kept me fired up and on track. You’ll scratch “pay off car loan early” off your list faster than you think.

The Debt Avalanche Method

Another option is the debt avalanche method, which prioritizes debts with the highest interest rates first. With this strategy, you’ll pay off your debts in order of interest rate (from highest to lowest), putting all your extra cash toward the debt with the highest rate while making minimum payments on the rest. Mathematically, the debt avalanche method will save you the most money in interest over time. But it can be harder to stay motivated if your highest-interest debt is also your largest balance.Many people prefer the debt snowball method for its quick wins and psychological boost. But the best debt repayment strategy is the one you’ll stick with for the long haul. 

Key Takeaway: 

Before you try to pay off your car loan early, dive into the details of your loan. Know your interest rate, check for prepayment penalties, and crunch some numbers to see how much you could save. Then, make a plan that includes setting a target payoff date and adjusting your budget. Consider using automatic payments to stay on track and prioritize paying off this debt first for faster financial freedom.

Consider Refinancing

If you’re looking to pay off your car loan early, refinancing might be the way to go. It could help you snag a lower interest rate and save some serious cash in the long run.

But before you jump in, make sure you know your current interest rate and shop around for a better deal. Check with credit unions, banks, and online lenders to see what rates they’re offering.

And here’s the key: aim for a shorter loan term when you refinance. That way, you’ll pay off your loan faster and save on interest, even with a lower rate.

Just keep in mind that refinancing might extend your loan term if you’re not careful. So if you do end up with a longer term, consider bumping up your monthly payments to stay on track and pay off that loan ASAP.

So if you’re ready to refinance, do your homework, crunch the numbers, and make a plan. Your future self will thank you when that car loan is in the rearview mirror.

Automate Payments

Want to know one of the easiest ways to stay on track with your car loan payments? Automate them.

Setting up automatic payments means you’ll never miss a due date or accidentally fall behind. Plus, it takes the stress out of remembering to pay each month.

Most lenders make it super simple to set up auto-pay. You can usually do it online or over the phone in just a few minutes. Just make sure you have enough money in your account each month to cover the payment.

I’ve been using automatic payments for my car loan for years now, and it’s been a game-changer. No more worrying about due dates or late fees. And as a bonus, some lenders even offer a small interest rate discount for setting up auto-pay.

So if you haven’t already, consider automating your car loan payments. It’s a small step that can make a big difference in staying on track with your repayment plan and reaching your goal of paying off your loan early.

Celebrate Your Success

You did it. You set a goal to pay off your car loan early, made a plan, and followed through. That’s a huge accomplishment and one that deserves a serious celebration.

Paying off debt is no small feat, and getting rid of a car loan early is a major milestone. Think about how much money you saved on interest and how great it feels to own your car free and clear.

So go ahead and treat yourself. Maybe it’s a nice dinner out, a weekend getaway, or splurging on something you’ve been wanting for a while. You’ve earned it.

But beyond just celebrating, take a moment to reflect on what you’ve learned and how far you’ve come. Paying off debt takes discipline, sacrifice, and a lot of hard work. And now that you’ve done it once, you know you can do it again with other financial goals.

So savor this moment and be proud of what you’ve accomplished. And then take that momentum and keep pushing forward on your journey to financial freedom. The road ahead is wide open.

Key Takeaway: 

Refinancing can be a smart move to pay off your car loan early—just aim for a lower rate and shorter term. Don’t forget to shop around and keep an eye on extending terms. Automating payments is another hassle-free way to stay on track, possibly snagging you a rate discount too. And when you finally clear that loan, celebrate big; it’s not just about saving money but enjoying the freedom and achievement of meeting your financial goals.

FAQs in Relation to Pay Off Car Loan Early

Is it good to pay off a car loan early?

Paying off your car loan early can save you interest costs and free up cash, but check for prepayment penalties first.

What happens if I pay an extra $100 a month on my car loan?

An extra $100 monthly can shorten your loan term and cut down on the total interest paid. It’s a smart move financially.

How can I pay my car loan off without penalty early?

To dodge penalties, review your loan terms carefully. Some lenders allow early payoff without fees. Planning is key here.

How much does your credit score increase after paying off a car?

Your credit score might see a slight uptick after paying off your car due to reduced debt, but expect gradual changes.


Paying off your car loan early is a smart financial move that can save you money and reduce stress. By understanding your loan terms, calculating your savings, and making a plan, you can accelerate your debt repayment and get closer to owning your car outright.

Remember, every extra payment counts, no matter how small. Whether you’re setting aside a little extra each month or making lump sum payments when you can, you’re taking control of your financial future. And if refinancing makes sense for your situation, don’t be afraid to explore that option too.

Celebrating your success is just as important as the journey itself. When you make that final payment, take a moment to reflect on your hard work and dedication. You’ve achieved something great, and that deserves recognition.

So, are you ready to pay off your car loan early and experience the freedom that comes with it? You’ve got this, and I’m cheering you on every step of the way.


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