Paying off your car loan early can come with a variety of potential benefits. It could save you thousands in interest payments and help pay down your other loans faster. However, it may not be the best financial decision for everyone. Here are a few pros and cons you should consider before deciding whether or not to repay your car loan early.
Pros
You Can Save Money on Interest Payments
You’ll see some extra money in the bank each month after you pay off your car loan — which gives you more flexibility with how you use that money in the future. If you have credit card balances or another type of revolving debt, such as student loans or mortgages, paying off your car loan may help free up some extra cash each month to devote toward those debts instead.
Improves Your Debt-To-Income Ratio
Your debt-to-income ratio essentially indicates the percentage of your monthly income that goes straight toward repaying your debts. It is an important factor that pretty much all lenders will take into consideration to determine how much you, as a borrower, can afford to repay. The higher this ratio, the riskier you will seem to the lender.
Less Risk of You Being Upside-Down on The Loan
A lot of times, cars depreciate at a faster pace than you can pay off your loan. This is especially true if you’re paying a high rate of interest or have an unusually long repayment term. Being upside-down on your auto loan means you owe the lender more than the car is worth at that point. This is a tricky situation because if you sell the car, you’ll receive less than what you owe your lender.
Cons
You May Be Charged a Prepayment Penalty
Some lenders charge borrowers a prepayment penalty for paying off a car loan early. This can increase the cost of your loan. So, make sure to contact your lender to check if they charge this penalty.
The Money You Have May Be Better Spent Somewhere Else
If you have high-interest debts, you’re better off putting the extra money you have toward those balances. This is especially true with personal loans and credit cards.
