Is Paying Off a Car Good?

Though the decision to pay off a car may seem obvious, there are a number of factors a consumer should consider before making this decision. As with any large expenditure, a consumer should take the time to gather information and carefully consider all the available options. By doing this, the consumer will be able to make the right decision for her personal situation.

Loan Terms

Many car loans have prepayment penalties or require the payment of the full interest amount even if paying early. Before paying off a car loan, the consumer should determine whether or not the loan has these restrictions. In the case of a prepayment penalty, the consumer should compare the amount of interest savings of paying off early versus the amount of the penalty when making his decision. In the case of a loan requiring the full payment of interest, it generally makes little financial sense to pay the loan off early.

Emergency Fund

Many financial experts recommend that a consumer have an emergency fund to cover between three and six months of expenses. An emergency fund can be useful paying living expenses in case of a layoff or illness, replacing a broken furnace or other unexpected costs. Without an emergency fund, many consumers would have to use credit cards or other sources of high interest loans to finance these costs. If paying off a car loan early will cause a consumer to not meet this requirement, the consumer may want to consider saving the money and not paying off the loan.

Other Uses

Another consideration before paying off a car loan is what other uses the consumer might have for the money. If the consumer has a car loan with a 7 percent interest rate, but has significant credit card debt at a higher rate, it would be a better use of the money to pay off the credit card. If a consumer has a very low rate car loan, the consumer may make a higher rate of return by investing the money instead of paying off the car loan.

Reducing Debt

Some people simply do not like to be in debt. While few people actually enjoy being in debt, it is not a significant concern to most people. While paying off the car loan at the expenses of gaining a higher rate of return by saving and investing the money may not make sense mathematically, each consumer has to decide what is best for her specific situation. As long as the consumer is not putting herself into a desperate financial situation by paying off the car loan, there is nothing wrong with doing it.