Debt · 13 recordsPay off a car loan early

Overpaying a car loan saves interest only if the lender applies it to the balance and does not charge for it. This finds the actual payoff figure and terms first, sets an overpayment you can keep up every month, and points the old payment at savings once the loan is gone.

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Goal

The car loan paid off early Month 6

Every extra payment applied to the balance, not the next instalment.

Know the numbers Week 2

The payoff figure and the terms, before any extra money goes in.

  • Get the current payoff figure from the lenderDo firstDay 3
  • Check the contract for early repayment chargesDo firstDay 5
  • Ask whether extra payments go to the principal or the next instalmentDo firstDay 7
  • Choose a monthly overpayment I can keep upDo firstDay 12

Pay it down Month 6

Automatic, and checked.

  • Set the overpayment to go out with the regular paymentDo firstWeek 2
  • Check a statement shows the balance dropping fasterDo firstWeek 6
  • Put any windfall toward the balanceMonth 3
  • Point the old payment at savings once it is paidMonth 6

Routines

  • Check the loan balanceweekly
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Check it hits the principal

Some lenders apply extra money to next month's instalment instead of the balance, which saves almost no interest. Ask, and then check a statement.

When the loan is paid off, keep making the payment, into savings. You are already used to living without it.

Questions

Pay off a car loan early, answered.

Usually, when the interest rate is higher than the money would earn in savings and there is no early repayment charge. If you have no emergency fund, or have higher-interest debt such as a credit card, those come first.
Ask the lender, and then check the next statement. Some lenders treat extra money as an early payment of next month's instalment rather than a reduction of the principal, which saves far less interest.
It can dip slightly when an account closes, and it usually recovers. The interest saved is normally worth far more than a small, temporary change to the score.
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