Paying off your car loan early offers several benefits, although improving your credit score or establishing a positive credit history may not be the reason to pay off early. You can possibly save money and eliminate debt by paying off your loan, but consider your other finances and future vehicle intentions before eliminating the debt.
Money Saving Benefits
Unless you bought a brand new car with a zero-percent loan, you are paying to borrow money. If you pay it off, you can potentially save thousands of dollars over the term of your car loan. For example, a $15,000 loan borrowed at 6.99 percent costs you $2,820 over a 60-month term. To determine the amount you can save, call your bank to ask for your loan's per-diem amount. The per-diem is the cost of interest you pay daily.
Personal Benefits
Paying off your loan not only allows you to save thousands of dollars. Eliminating any debt from your monthly budget is beneficial. While you still have to pay to insure and maintain your vehicle, you will have extra money each month to save or put toward other forms of debt. If you should lose your job, you can take comfort in knowing you won't lose your car due to non-payment. You can also sell your vehicle if necessary.
Credit Reporting
Your lender will report your early loan payoff to the major credit bureaus. This allows you to pursue other lending opportunities because your debt-to-income ratio (the amount you owe versus the amount you have coming in) is less. However, paying off your loan early does not necessarily help your credit score. Banks prefer to see that you have a long-term credit standing, meaning you made all of your payments on time for a sufficient period. You may appear to have limited credit history despite paying off a major debt.
Considerations
If your auto loan interest rate is low, you may want to focus on paying off other high-interest loans or debt first, such as credit cards. Before putting all of your money toward your vehicle loan, figure out long-term costs for any other debt you have or repay. Using your money to pay off debt with the highest interest rates first saves you money in the end.
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