Should You Pay Off A Car Loan Early?

Read Time: 5 minutes

Auto loans provide valuable financing to borrowers who need a helping hand affording a new or used car. But paying off an auto loan over its full term can mean forking over plenty in interest and making month after month of monotonous, soul-sucking bill payments.

That begs the question: Should you pay off your car loan early?

The answer will depend on your unique circumstances and financial situation. There are advantages and downsides to making accelerated payments and repaying your debt faster than expected, but not everyone is a good candidate for this strategy.

Take a closer look at your options and crunch the numbers carefully.

Car Loan Terms

Car loans typically range anywhere from 24 to 84 months. Most people nowadays choose a 60-month term, according to Renee Horne, chief marketing and customer experience officer with Chase Auto at JPMorgan.

“A 60-month term strikes a nice balance between affordable monthly payments and the total amount of interest paid over the life of the loan,” she says. “Although shorter terms might have lower interest rates, they often have higher monthly payments.”

On the other hand, longer terms usually equate to lower monthly payments but have you paying more total interest overall.

Personal finance expert Jon Morgan with Venture Smarter believes the sweet spot for most borrowers is a loan that spans 36 to 60 months.

How to pay off your car loan early

Paying off a car loan early means completing your loan payments before the set term ends. 

“Most car loans and lenders allow repayment ahead of schedule, but you’ll need to check your specific loan agreement. Find out if you’ll be charged any prepayment penalties,” says Ben Klesinger, co-founder of Reliant Insurance Group and Helping Hand Financial. 

You can accomplish your goal of paying off your loan early in a few ways:

  • Make accelerated payments, which involves paying more each month, or at specific intervals (such as every two weeks or one extra full monthly payment per year), toward your principal owed. Contact your lender or loan servicer to learn the rules for how this extra money should be sent/applied. “One tactic here is to round up your monthly payments. For example, if your monthly payment is $275, rounding up to $300 per month can help chip away at the principal more quickly, ultimately saving you money on interest,” adds Horne.
  • Make a lump sum payment, which requires paying off your remaining balance in full with one final large payment, assuming you can afford to.
  • Eliminate loan add-ons, which can include items like guaranteed asset protection (GAP) insurance coverage, an extended warranty, or a maintenance service contract. If any of these optional items were rolled into your loan by the dealership, contact them and find out if they can be canceled and removed from the loan.

The pros of early repayment

Paying off your loan early is definitely worth considering. That’s because doing so may yield big savings.

“The advantages include savings on interest,” Klesinger notes. “For example, on a $25,000 car loan at a 6% fixed interest rate over 60 months, paying it off in only 40 months can save you over $1,200 in interest.”

Automotive expert Lauren Fix, author of Car Coach Reports, explains that early loan payoff can also reap dividends in other ways.

“It can help reduce your car insurance rates, especially if you are driving a high-mileage vehicle. And if you choose to pay off your loan early in one lump sum, it will free up funds for your monthly bills, bringing you one step closer to being debt-free if you still carry any debts,” Fix says.

Additionally, getting rid of that car loan debt early can lower your debt-to-income (DTI) ratio, which could even boost your credit score—helping you to qualify for other loans and credit accounts.

The cons of early repayment

However, there are drawbacks to this decision.

“Some lenders may charge prepayment penalties, which could negate your interest savings,” cautions Horne, noting that the penalty is usually around 2 percent of your outstanding balance. “In addition, using your funds to pay off the loan early might leave you short for other unexpected expenses.”

Consider, too, that your car loan’s interest rate is likely fixed and lower than what you’re being charged by other types of financing.

“Let’s say you have a $10,000 credit card debt at a higher 22% interest rate, as well as a $25,000 car loan at a fixed 6% interest rate over 60 months. By prioritizing the car loan payoff early, you’ll miss out on potentially saving more by tackling the higher-interest credit card debt first,” suggests Morgan.

And, while paying off your loan early can decrease your DTI ratio, your credit may still suffer because you’ll stop logging on-time monthly loan payments.

“Once you pay off that loan, you’ll no longer have positive payment history for that longer-term loan on your credit reports,” continues Fix.

Worthy prospects for paying off a car loan quickly

Good candidates for paying off a car loan early include those with stable income, no high-interest debts, and some extra cash in the bank.

“This is also ideal for anyone looking to lower their DTI ratio or avoid being upside-down on their loan,” adds Horne. “However, it’s essential to ensure that your payments won’t strain your budget or deplete your savings.”

It’s a smart move, as well, if you have an auto loan with a high fixed or variable interest rate.

“Assume your car loan principal is $20,000 at a 7% fixed interest rate over 60 months. In this scenario, you’d pay roughly $4,200 in interest. But by paying off the loan in only 30 months, you could save over $2,000,” Morgan points out.

Refinancing could be a better alternative

Another way to pay off your existing car loan early is to replace it with a new loan—preferably one with a lower interest rate and/or more preferred terms–via refinancing. Yes, you’ll still have an outstanding debt to repay with this option.

Still, refinancing your car loan could be a better choice than making a lump sum payment or accelerated payments if it’s a more affordable option for you today and long-term.

“If you have the cash now to pay off your loan without creating strain in your budget, it’s likely the wiser option. Alternatively, if your goal is simply to lower your monthly payments to support your cash flows and budget size, a refinance could be worth it,” Horne says. “But a refinance could result in paying even more interest over time, depending on the loan’s terms.”

The Bottom Line

Paying off your auto loan earlier than expected could be a smart financial strategy that frees up money for other needs and goals, including paying down other bills, salting away savings, and investing in retirement. However, it’s important to weigh the pluses and minuses of this choice based on your financial status. 

“By carefully considering your loan terms, financial health, and long-term goals, you can make a decision that best supports you now and in the future,” recommends Horne.

Erik J. Martin

Erik J. Martin is a Chicago area-based freelance writer and public relations expert whose articles have been featured in AARP The Magazine, Reader’s Digest, The Costco Connection, Bankrate, Forbes Advisor, The Chicago Tribune, and other publications. He often writes on topics related to real estate, personal finance, technology, health care, insurance, and entertainment. He also publishes several blogs, including and, and hosts the Cineversary podcast (

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