If you want to pay your auto loan off early, there are some great ways to take advantage of this often beneficial opportunity. It is recommended, however, to avoid diving in and paying it off without first reviewing your options. Because depending on the kind of contract you signed, you may be doing yourself more of a disservice than a favor.
Decide Whether to Double Payments or Pay a Lump Sum
You have more than one option for finishing up your loan after youve financed your car. You can double up payments, making them twice a month instead of once. Or you can complete it in one lump sum. Deciding which option is best for you primarily boils down to what you can afford to pay as well as what types of penalties or charges may be attached to either option.
Explore the Type of Interest Loan You Have
There are two types of interest loans that you want to consider when deciding whether to pay your auto loan off early: the simple interest loan and the precomputed interest loan. The simple interest loan only adds interest as each payment is due. So the earlier you decide to complete your loan early, the more interest you will forgo.
However, if you have a precomputed interest loan, this means all of your interest was added in at the time that you financed your car. So when it comes time to pay off your loan, you will have to pay all of the interest with it. This may not be so bad if you only have maybe 5-10 payments left. But if youve taken out a 72-month loan and youre only in month 25 then you will have to pay thousands in order to pay your auto loan off early.
Make Sure to Check for Potential Penalties
Some dealers charge penalties for paying off loans early, so its a good idea to review your contract to see if there is some sort of punishment attached and whether paying that penalty is financially worth it.
If youve financed your car and would like to pay your auto loan off early, taking the time you need to explore your options will help you determine the best way to handle your desire.
