How to Pay Off a Car Loan Early

Paying off your car loan ahead of schedule can feel like a major financial win. It will free up cash in your monthly budget and save you money on interest. Eliminating your vehicle payment will also reduce your overall debt load. Still, many borrowers hesitate to put extra cash toward their vehicle payment, as they are unsure if it’s even worth it. 

Learn how to pay off a car loan early so you can save money on interest and eliminate a recurring payment from your budget. With the right approach, you can shorten your loan term and build better financial habits. 

How to pay off a car loan early

There’s no one-size-fits-all method for how to pay off a car loan early. You need to choose the approach that works best for you. You can also combine several different methods to speed up the process even more. 

Make biweekly payments

Traditional vehicle loans are due once a month, which leads to 12 payments per year. If you want to pay off your vehicle a little early, try splitting your payment in half and paying every two weeks. If you use this method, you will make 26 half-payments per year, or 13 full payments instead of 12. 

Imagine you have a 72-month auto loan term. If you use this method from the beginning of your term, you could pay off the loan six months ahead of schedule. 

That extra payment each year also reduces your loan balance and the interest you pay over time. Making smaller, more frequent payments can also feel more manageable if you’re working within a tight budget. 

Round up your monthly payment

Rounding up your car payment is one of the easiest ways to make progress without dramatically changing your budget. If your vehicle payment is $447, you could round it up to $500. That extra $53 goes directly toward your principal balance. Roughly every nine months, you would knock one payment off your loan term ($53 x 9 = $477).

The rounding method may not be as effective if your vehicle payment is already close to the next $100 threshold. For example, if your payment is $485 and you round up to $500, you would only be paying an extra $15 toward the loan balance. 

If that situation applies to you and you still want to use the rounding method, consider rounding to a number that has you paying at least $50 extra toward your payment. That way, you can get ahead on payments and save money on interest. 

Make one extra payment per year

If making biweekly payments isn’t an option, committing to just one extra payment per year can still make a huge difference. You can time this extra payment with a tax refund or work bonus. 

If you get paid bi-weekly throughout the year, consider making an extra payment on your vehicle during one of the months when you receive three paychecks. 

The earlier in the loan you start making the extra payment, the better. On a longer loan, you could eliminate 3–6 months of payments from your term. 

Put windfalls toward your loan

Any time you bring in unexpected cash, consider putting some or all of it toward your loan. This method gives you a chance to pay off huge chunks of your loan, depending on how much extra money you receive. Examples of windfalls include:

• Work bonuses
• Tax refunds
• Cash gifts
• Checks with lots of overtime

Instead of spending these windfalls on discretionary purchases, consider applying them directly to your car loan. Making lump sum payments can reduce your principal balance and lower the total interest you’ll pay. 

Use multiple methods for the most impact

Any one of these methods can be helpful in paying off your vehicle early and saving hundreds in interest payments. If you are eager to pay off the loan as soon as possible, consider stacking two or three approaches. 

For example, you can apply windfalls to the principal balance, make an extra payment each year, and round up your monthly payments. 

Is it a good idea to pay off your car loan early?

In many cases, paying off your car loan early is a smart financial move. But it depends on your overall situation. You should consider paying off your vehicle loan early if:

• Your loan has a high interest rate
• You want to reduce your monthly financial obligations
• You’re focused on becoming debt-free
• You have a stable emergency fund already in place

Eliminating a car payment can free up cash for other goals, such as saving toward your retirement or investing. However, there are situations where paying off your loan early may not be the top priority. You should allocate your extra money elsewhere if:

• Your auto loan interest rate is very low
• You have higher-interest debt, like credit cards
• Paying extra would strain your monthly budget
• You don’t have an emergency fund yet

In these cases, focus on building financial stability before paying off your car. 

Does paying off a car loan early hurt your credit?

Paying off your car loan means the account will be closed. When an account is closed, it will have a small, temporary impact on your score because your credit mix becomes less diverse. 

The average age of your credit accounts gets lower, as well, which impacts your score. If you have other positive payment histories and accounts, the impacts will be minimal. 

There are also positive effects, like a better debt-to-income ratio. If you want to continue building your credit after paying off your loan, maintain consistent, on-time activity on your other accounts. 

Prepayment penalties: What to know before paying early

Before making extra payments, verify that your loan does not include prepayment penalties, which is a fee a lender charges if you pay off your loan ahead of time. These fees are much less common in auto loans, but it’s important to check your loan conditions, just in case. 

Conclusion

Paying off your car loan early can support your long-term financial goals. If you want tools to help you continue building strong credit habits, check out Kikoff. Our platform empowers users to build positive payment history through verified rent reporting, free error dispute letters, and more. 

Take a step toward stronger credit habits with Kikoff.