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Paying Off a Car Loan Early: Risks and Rewards

Paying off a car loan early is a great way to save on interest, but it’s worth pointing out that it may not always be an option, and it may not always be the right option for your financial situation. If you are interested in learning how to pay off a car loan early, and you want to avoid the common pitfalls, you’ve come to the right place.

Is it Good to Pay Off a Car Loan Early?

Is it good to pay off a car loan early? The short answer is yes! If you can budget effectively, plan ahead, and pay a little bit extra each month, paying off a car loan early can help you cut down on interest costs, lower your debt-to-income ratio, and free up your income for other projects. We know many Omaha and Gretna drivers who have saved by taking this route.

With that said, some car loan agreements include a prepayment penalty. Make sure you review the fine print carefully, because we can’t imagine anything worse than working hard for years to pay off a car loan early, only to find that you’re still on the hook for a hefty fee. Here’s what else you need to consider when you’re planning your budget:

  • Could the money you’d spend on paying off a car loan early be put to better use elsewhere? If you already have a low interest rate, it might make more sense to invest or set money aside for future goals.
  • Having money set aside for emergencies is more important than shaving a few months off of your loan term. Don’t leave yourself in the lurch.
  • If your main goal is to make on-time payments and build your credit, it might be best to stick to basics and make as many on-time payments as you can. Sticking it out for the whole loan term might add a few extra points to your score.

How to Pay Off a Car Loan Early

As long as you’ve read the fine print of your contract and you’re aware of the risk involved, paying off a car loan early is pretty simple. Smart financial habits you’ve developed elsewhere are sure to reward you in this endeavor:

  • Make Bi-Weekly Payments – If you divide your monthly payment by two, and then pay every two weeks, you’ll make the equivalent of 13 monthly payments over a twelve month period. Once again, make sure to check with your lender before you start.
  • Round Up Your Payments – A little extra effort goes a long way. If you round up your payments to the nearest $50, you’ll make a bigger dent each month.
  • Set a Little Money Aside Each Week – Don’t want to worry about rounding up every month? Your lender may permit you to make one additional lump-sum payment per year.
  • Don’t Skip Payments – This one sounds simple enough, but when some lenders allow you to skip one to two payments per year, it can be hard to resist the temptation. Skipping payments will only increase your total interest costs.
  • Refinance for a Lower Rate – OK, so refinancing isn’t technically a means of paying off your car loan early. However, if your goal is to lower your interest costs, refinancing may be able to get you a lower rate and a lower monthly payment–the best of both worlds.

Learn More with Honda of Lincoln!

Our financing team is here to help with any and all of your leasing and financing needs! Now that you’ve seen how to pay off a car loan early, check out some of our other car-buying tips from your home in Lincoln or Bellevue, or reach out to our experts for more information. We also offer other helpful feature regarding your auto loan with how you can refinance your car. You can learn more about the different vehicles you can find at our dealership with a look at used vs. CPO cars.

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