Takeaways
- Car note monthly payments can eat away at your monthly cash flow.
- Making multiple payments throughout the month can increase your ownership.
- Paying off your car note in full can improve your credit score.
- High auto loan interest rates can increase the amount of interest you pay.
- With extra cash around, weigh your debt repayment options.
Have you been thinking about trying to pay off your car note recently? If you have a new or newer car with a high monthly payment that seems to be eating away at other financial objectives – saving for a vacation, retirement, padding your savings account – paying off your car loan could be the right money move. Especially if you have some extra cash saved or recently received an unexpected cash infusion, like a bonus. Let’s explore how paying off your car note early could benefit you and when it makes sense to implement this strategy.
Smart Money -> Need More Money? Try These 29 Side Hustle Ideas
Benefits of Paying Off Your Car Loan
Paying off any type of debt comes with its benefits, but paying off a car note ahead of its due date has several distinct advantages. Let’s examine a couple of specific benefits:
No Debt: Being debt-free can feel priceless. By paying cash for your car or paying the remaining balance on your car loan, you remove that debt completely off your balance sheet. If you don’t like having debt, this can be liberating.
Frees Up Cash Flow: Once your loan is paid off, you free up cash flow previously allocated to your loan provider. You can repurpose your budget to meet other financial goals, like savings, investing, or saving for a down payment.
Improves Credit Score: Your credit score is comprised of many variables, one of which is your total debt outstanding. Total outstanding debt is a factor in your credit utilization. By paying off your car note you decrease your debt load, improve your credit utilization, and increase your credit score.
Keeps You Above Water: Your car is a depreciating asset. Depreciation means that the value of your car will decrease over time. Newer cars depreciate very fast because of these high initial costs. By paying off your car in advance, you avoid being underwater on your loan, where your car note is higher than the market value of your car. Underwater loans occur when you secure a loan when car prices are high, but the market value of your car decreases quickly, and your loan is worth more than the value of your car.
Smart Money -> Ready to Buy a Car? 7 Steps to Get Fully Prepared
Smart Tip:
The most common car note term length is 72 months1. Longer term lengths increase the total interest paid over the life of the loan.
Pay Off Your Car Loan Early: 5 Easy Steps
Once you have decided to make a lump sum payment or try to pay off your car note early, here are five ways to reach your goal of being car note-free:
Make Partial Lump Sum Payments: Small cash windfalls could come your way – bonus, salary increase, a boost in side hustle income – to help you pay off your car note, or maybe your slush fund is overflowing. In this case, you can make payments toward your car note principal to reduce the total amount owed.
Smart Money -> 12 Ideas for Making Money In Less Than One Hour
Make Partial Lump Sum Payments: Small cash windfalls could come your way – bonus, salary increase, a boost in side hustle income – to help you pay off your car note, or maybe your slush fund is overflowing. In this case, you can make payments toward your car note principal to reduce the total amount owed.
Smart Tip:
Early principal payments will not change the amount of your monthly car payments. These early payments will, however, increase the proportion of monthly payments applied toward the principal and thus decrease the overall interest paid over the life of the loan.
Make Multiple Car Payments in the Month: Don’t have a pot of cash to throw at your car note? Consider making smaller payments throughout the month toward your car’s principal balance. An extra $50 or $100 paid monthly will erode your principal balance. If you have extra income, consider automating a payment in the middle of the month.
Round Up Your Monthly Payment: Another effective strategy to shave down your car loan is to make larger payments on your car note each month. For example, if your car note is $356, round up and pay an even $400. The extra funds will go toward your principal balance and help you accelerate paying off your car note.
Pay off the Full Balance: The ultimate move is to pay off the remaining balance of your car note all at once. Before writing a check, consult your lender to ensure you pay the correct amount. The current loan balance could vary from your last statement because of accruing interest or close-out fees. Have the loan provider supply you with the exact amount. Once you have the appropriate amount, you can either write a check or transfer cash to pay off your loan in full. Your car note will be gone in one fell swoop.
Smart Money-> How to Pay Off Debt Using the Debt Snowball Method
Smart Tip:
Loan providers sometimes limit your ability to pay off your car balance online or with their app. For example, BMW sets a monthly payment limit within its online payment portal. Depending on the loan provider, your monthly payments could be capped at a specific amount (e.g., $5,000 or $10,000). Check with your lender to see if these payment ceilings apply to your loan. Otherwise, you might need to do it the old-fashioned way and write a check or make hefty online payments over several months.
What Happens When You Pay Off Your Car Note?
After you have written the final check for the remaining balance of your car loan, you can choose to close your account with the lender. Closing out your account could be good financial hygiene. Particularly, if your car note is with a lender where you don’t have a savings account or checking account. Consolidating accounts helps manage your personal finance accounts, so it might be worth closing this account.
After your final car note check clears, you will get a statement balance from your lender showing the balance due on your account is zero. Keep these statement balances for your records. After the loan is paid off, your lender will start transferring the title from the lender’s name to your name. Title exchange might take several business days or a couple of weeks, depending on your state’s Department of Motor Vehicles, and is usually an automatic process in the lender’s system.
Smart Summary
Paying off your car note could be a smart money move, but it should be contemplated in the context of other financial goals. Consider whether those funds would be better for bolstering an emergency or slush fund. If you cannot resist the urge to pay off your car, then pay off your car note early and move on to achieve your other financial goals. Reducing your debt load can help you reach other essential money goals.
(1) 72 Month Term
