Pros and Cons of Paying Off Your Car Loan Early

What happens when you pay off a car loan early? You could save hundreds in interest, but there are also possible drawbacks to that plan.

Dan Clarendon - Author

Jun. 28 2021, Published 4:04 p.m. ET

Man driving car
Source: Getty Images

By May 2017, 107 million Americans had auto loan debt, according to CNN, which means about 43 percent of the adult population in the U.S. owed money on an auto loan that they probably wanted to pay off post-haste. What happens when you pay off a car loan early?

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Well, for Taylor Lenz, a man Student Loan Hero interviewed in 2020, the early pay-off meant getting out of debt entirely.

That’s an enviable position, but there are considerations to make before putting down the money to pay off a car loan.

You could save hundreds in interest with an early car loan pay-off.

Person signing documents
Source: Getty Images

Lenz also saved of hundreds of dollars of interest by paying off his car loan early, and depending on the terms of your loan, you could, too. According to Student Loan Hero’s Lump Sum Extra Payment Calculator, if you pay $300 a month for a loan with a 5-percent interest, and you have a $10,000 balance on that loan, you would save $788 by paying off the loan now. (You’d also save $289 just by paying a lump sum of $2,000, so every bit helps.)

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Lenz said that his family “had experienced the euphoria of not having loan payments” and wanted to experience that feeling again. “Something just clicked about six months ago,” he explained. “When I looked at the numbers, I saw that if we used our extra money—like what we put towards savings—we could hammer out the loan in a short time.”

There can be real benefits to paying off a car loan early—and real drawbacks, too.

As Credit Karma reports, you should consider the possible pros and cons of the early pay-off. One of the biggest benefits is the savings in interest—unless your car loan comes with precomputed interest that your lender still makes you pay. Another benefit is that you can avoid being upside-down on the car loan, owing more than the car’s value.

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Possible drawbacks include any prepayment penalties on your car loan. If the lender of your loan charges a fee for early pay-offs, that fee means that the pay-off isn’t worth it. 

Another possible drawback is the impact on your credit report. If you’re using the car loan to establish your creditworthiness by making on-time payments—or if the car loan is one of the oldest or the only accounts on your report—it might make more sense to keep that loan active.

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It's possible that other debt you have carries a higher APR (annual percentage rate) than your car loan, and if so, you might want to pay off those debts first, Credit Karma advises.

It might also be wise to figure out how the pay-off fits into your budget and your financial goals. Lenz said he paused his family’s retirement and college savings contributions to raise money for the pay-off. Lenz admits that he might have been better off investing that money. But he also said that not having monthly obligations is a “huge” deal for him and his family. “It allows me to focus on what’s important … like family vacations and trips,” he added.


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