How to Pay Off Your Car Early

Responsible borrowing is important, and one method many borrowers use to reduce their debts is to pay off one or more loan early. Here at Tom Kadlec Kia we have a great deal of experience working with auto loans, and we're here to provide you with that expertise to help you make the best decision for you when it comes to your car loan. If you're considering paying down your car loan or paying it off early in full, here are the answers to the questions you're likely asking yourself right now.

What Is the Best Way To Pay off a Car Loan Early?

If you're looking to pay off your car loan ahead of schedule, there are several options that can help you reduce your car debt while remaining fiscally responsible. It's important to remember that you should only follow an advanced payment plan if it makes sense as part of your larger financial goals. If you think that paying early will be beneficial to you, consider one of these options:

• Pay bi-weekly: A simple method to increase your payments so you may not even notice is to ask to pay half your monthly premium every two weeks. While this may seem like the same thing as monthly payments in full, with 26 payments per year you'll effectively make one month of additional payment each year, helping to reduce your total term and interest paid.
• Round up your payments: If your dealer does not offer bi-weekly payments, or you prefer a more consistent approach from month to month, another effective way to increase your payments and pay off your loan early is to round your payment up to the next hundred-dollar amount. This makes budgeting easier because you have a simple and clean amount, and it increases your payments to finish your loan payments ahead of schedule.
• Make a one-time payment: Sometimes, while you may not be able to afford to pay consistently higher payments, you may find yourself in a position to afford a one-time lump sum payment to your car loan. Making an additional payment beyond your monthly premium directly lowers your debt balance while allowing you to continue making monthly payments at your previously arranged levels to not alter your monthly budget.
• Refinance your loan: Some auto loans come with strict rules about payment plans that include fees for any deviations. If your loan is not eligible for the other methods above, speaking with your dealership or the bank that provided the loan may allow you to refinance the loan under new terms with a higher monthly payment, or with a one-time lump sum payment to reduce the total debt remaining and term of the loan.

Is It a Good Idea To Pay Your Car Loan Ahead of Schedule?

Although it is often beneficial to pay off your car loan ahead of time, that doesn't mean it is always the best decision. Before you commit to a payment plan or large payment designed to shorten the term of your loan or pay it off entirely, consider the following points to ensure it is your best option:

• Ask about pre-pay fees: Some auto loans are drafted with the expectation of a set payment schedule. This can allow you to get more favorable terms, however, it reduces your flexibility to alter your structure. If your loan includes pre-payment fees, paying your loan off early may not come with the benefits you hoped.
• Consider your other debts: When looking to spend additional income on debt reduction, it's important to take a strategic approach to maximize the benefit of your savings. If you have other debts with higher interest rates, for example, it may make more sense for you to pay them down first to reduce as much interest accumulation as possible.
• Factor in savings account reduction: While it can be tempting to pay off a debt as soon as you have the money available to do so, it may not be the most fiscally responsible course of action if it depletes your savings. Keeping some money in your savings account allows you to prepare for unforeseen financial circumstances, and reducing it too greatly may expose you to risk.

Image via Flickr by Credit Cafe

What Effect Does Paying a Car Loan off Early Have on Your Credit Score?

There are many excellent benefits to paying off your loan early, but if you have any imminent credit checks it may not be the best option. While a paid-off loan carries weight on your credit report, an active one that is up to date on payments boosts your score more, so when you pay off a loan you may see a temporary dip in your score in the months that follow.

Will Making Larger Payments Lower the Cost of Future Car Payments?

No, making larger payments or a one-time payment against your car's financing likely will not alter your monthly requirements, due to the structural ways that auto loans are managed. Instead, making a payment above your minimum will pay off your total debt remaining, and shorten the overall term of the loan a corresponding amount both by reducing your current debt and the total interest accrued in the months to come.

Can I Get a Car Loan After a Bankruptcy?

Financial struggles can happen to anyone and they don't have to mean you can't make important purchases like buying a car. You may be able to get a loan following a bankruptcy that enables you to purchase the car you need. If you've gone through bankruptcy, get in touch with a dealership to discuss your loan options and see if there is a solution that matches your needs and finances.

If you're looking for advice on your car loan, we hope these questions can help you to make the best choice for you moving forward. If you are in the market for a loan for a new or used car, we'd love to hear from you and see how we can help you find the car of your dreams.