Should I Pay Off My Car Loan Early?

5 Benefits to Paying Off Your Auto Loan Early

Paying off your car loan early comes with some major benefits. It takes a lot of discipline to pay off debt early. With willpower and determination, it can be done little by little. It can help your financial future for years to come.

1
Save Money on Interest

Car with money in front of it
Shendart/iStock

Interest on a car loan can add up quick. It is easy to add up your savings by paying your loan off early. The amount of interest you pay every month does decrease a little bit because your balance is going down. Use an amortization calculator to determine your savings. I like to use Bankrate's auto loan calculator. Fill in your info and click show amortization schedule.

In the second to last column, it tells you total interest paid. Scroll down to the bottom and you will see the total interest paid. Now scroll back up to where it states "add additional monthly payment" type a reasonable number into it. Scroll down and see the total interest paid.

Subtract this lower number from your original number and that will be your savings on interest. The calculator will also tell you your new payoff date.

Example: A $15,000 car loan at a 7% interest rate would cost you $2821 in interest over a five year period. Add $50 a month to your payment and you would reduce your car loan by 10 months, and $487 in interest. More

2
Start Saving for Your Next Car

Couple admiring new car under cloth
Zero Creatives / Getty Images

Cars do not last forever. One thing for sure is eventually you will have to make another purchase. If you start saving all or at least a portion of your recently paid off loan, you can have a sizeable down payment ready to go when the time comes. More

3
Reduce Your Car Insurance Cost

Save Money on Car Insurance
PeopleImages.com / Getty Images

Once your car loan is paid off, you can reevaluate your car insurance coverage. Lenders require full coverage. Now that your car is paid off, you have options. 

  • Option 1: Keep your car insurance coverage as is. It may not save you money but if your vehicle is damaged in a car accident your car insurance can help repair the damage.
  • Option 2: Remove collision coverage. Collision coverage is the coverage you need when you damage your vehicle and it was your fault. It can also potentially help when someone damages your parked vehicle. Collision ​coverage is often the most expensive coverage. Take a look at your potential for an accident, how much your vehicle is worth, and how much the coverage costs. With all three of those pieces of information, you should be able to determine if the coverage is right for you. If you cannot decide, get some advice from your agent. Agents often do not tell you what to purchase but can offer guidance in the decision-making process. 
  • Option 3: Remove comprehensive coverage and collision coverage. Comprehensive coverage protects against fire, theft, vandalism, flying objects, deer, weather, and more. Removing comprehensive coverage would leave you with no physical damage coverage on your car insurance policy.
More

4
Lower Your Debt to Income Ratio

Calculating Debt to Income Ratio
Geber86 / Getty Images

A good debt to income ratio also known as a low debt to income ratio is important for your financial health. It can make a big impact on your future purchases. Lenders for major purchases like home and auto loans calculate your debt to income ratio to determine if you can afford more debt. Paying off debt lowers your debt to income ratio. It can also help improve your credit score. More

5
Financial Freedom

Womam grabbing some cash out of a wallet
Philippe Regard / Getty Images

Love living in the land of the free? Kind of hard to enjoy it when you can not go anywhere because all of your money is locked up in loan payments. Debt is so restricting. Paying off your car loan will open up a lot of possibilities for you and your family. A five-year loan is really too long for a depreciating hunk of metal. 

It is easy to find yourself owing more than the vehicle is worth if you are not trying to speed up your pay off. Ever get into a major accident or decide you want to sell and you will have to pay a big lump sum to cover the difference.

Paying off your car loan and any other debt for that matter will give you the true freedom you have always wanted. Saving today can make life in the future much more enjoyable.