Should You Pay Down Your Auto Loan Early?

Paying down any loan early regardless of its type can help consumers save money on both interest payments and also free up monthly cashflow in the long term. The benefit is typically three-fold and allows consumers to enjoy both interest savings, increasing monthly cashflow and also boosting of the debt to income ratio and credit worthiness in the long term.

Can Paying Off a Loan Early Hurt Your Credit Score?

The only way completely paying off a loan earlier could temporarily hurt your credit score is if you don’t have many other debts reported on your credit report. If you only have one active auto loan debt and very other little credit history and no other open lines of credit, then yes paying off an auto loan could actually have a negative impact to your credit worthiness. This is rare but it can occur in certain scenarios. The reason for it is simple, in this scenario the consumer has little to no credit history and they don’t have any other debt obligations. Since they are severely lacking in credit history in this scenario, it could potentially be more beneficial to have an open auto loan on their report since there is very little for lenders to go off of in terms of reviewing their credit.

How Much Money Can You Save On Interest Payments?

As a rule of thumb the savings from interest can be very significant. However, it all depends how much you can and can’t save on interest payments since this will vary depending on the underlying interest rate. APRs on auto loans are typically compounding interest rates so they can cost a lot to maintain as far as debt obligations go. If you have a 5 or 6-year term auto loan you can save thousands typically just from making an extra payment or two every year. It’ll also shorten your repayment period and allow you to pay down the loan quicker. However, if you really want to effectively pay down an auto loan you can make a double payment and see the impact it has on your principal. Pay close attention to your balance and you’ll notice that the second payment knocks off a much more significant amount of principal than the first payment. If this doesn’t motivate you to pay off your card quicker and save extra money then not much will.

Barring any pre-payment penalties, you’ll see a huge difference from putting extra money on your debt obligations. Depending on your interest rates a large part of the payment is usually being applied towards interest (this also depends on the amortization and at what point in time you make the payment). So, making extra payments has a more significant benefit.

Pre-payment Penalties

Pre-payment penalties prevent consumers from effectively paying down their debt early and saving money on interest payments. You should look to avoid lending options that carry pre-payment penalties at all costs.

Paying down debt early is always going to be your benefit no matter what the case is. In the off scenario you don’t have different types of credit on your report you should still look to save money on interest payments whenever possible and look towards opening a credit card or another line of credit to make up for the loss.