Here’s How to Pay Off Your Car Loan Faster | LendingTree

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As lenders are making car loans accessible to more borrowers, the terms of the loan can stretch as long as 96 months — which can stick borrowers with a car payment for up to eight years! A lengthy loan can rack up a significant amount of interest, so paying it off early can save money and take a costly item off your monthly budget.

Should you pay off your loan early?

It may seem like early loan payoff is a good idea, but there are a few factors you’ll want to consider before deciding if it’s the right move for you.

Determine your current balance and payoff penalties

The first step when deciding whether to pay off your car loan faster is to look at the details of your loan. Some lenders make it difficult to pay off car loans early because they’ll receive less payment in interest.

If your lender does allow early payoff, ask whether there’s a prepayment penalty, since a penalty could reduce any interest savings you’d gain.

Then, check your balance and make sure that any extra payments go toward the principal on the loan. Some financial institutions will automatically apply additional payments toward interest or other fees, rather than toward reducing the principal, or they’ll hold the funds as a credit toward your next payment. You may have to specify that the extra money is a “principal-only payment,” so run it by your lender first.

Calculate how much you’ll save

After you’ve figured out how much you owe and whether your lender imposes prepayment penalties, use an auto loan calculator to determine how much you’ll save if you pay off the car loan early. Make sure the savings outweigh any prepayment penalties you may incur.

Even if your calculations show minimal savings for early loan payoff, you may find other benefits that make it worth your while. For example, eliminating your loan through early payoff could help increase your credit score and free up money in your monthly budget.

Consider how paying off a car loan early affects your credit

Paying off your car loan completely could help or hurt your credit, depending on certain factors.

When paying off a car loan helps your credit

Early loan payoff can help your credit scores by improving your credit utilization ratio. The less debt you owe, the more likely your scores are to improve. Lenders prefer borrowers with a low credit utilization ratio, which is seen as a sign that you can manage repayments responsibly without using up your available credit.

Lenders also look at how much debt you owe in comparison to your income, or your debt-to-income (DTI) ratio, as a way to judge your ability to take on new loans. Having fewer debt payments, along with a completed installment loan and a history of on-time payments, could work in your favor whenever you want to apply for new financing, such as a home mortgage.

When paying off a car loan hurts your credit

It could hurt your credit score, however, if you lack another type of open installment loan. Lenders tend to look favorably on  current credit accounts that are in good standing than closed credit accounts. And without another installment loan, such as a mortgage, student loan or personal loan, you’ll limit your credit mix, which makes up 10% of your FICO credit score.

On the other hand, the history of your on-time payments will remain on your credit reports for up to ten years, so it’s still possible to have excellent credit, even without any open loan accounts. In addition, payment history makes up 35% of your FICO Score. Even if your credit score dips slightly from paying off your car loan, it may be worth paying off early if you have a high-interest loan. You can check your credit score here.

5 tips for paying off a car loan early

1. Consider refinancing your current car loan

If your car loan came with a high interest rate or other monthly fees, refinancing your auto loan could provide you with better terms and a lower payment, especially if your credit score has increased since you applied for the original loan (which is likely if you’ve been making monthly payments in full and on time).

As you look at options for refinancing, keep in mind that your goal is to pay off the loan quickly. Refinancing with a new 72-month loan is a relatively long time — that’s six years. Instead, look for a shorter term and a lower interest rate. If you do refinance for a long-term loan, consider paying extra toward the principal every month to pay off the loan early.

2. Make biweekly payments

If you change the frequency of your payment to every two weeks, rather than once a month, you’ll make one extra payment every year.

Here’s how it works: there are 52 weeks in a year, which means that not every month has just four weeks. In fact, some are a bit longer. That’s why people who get paid every other week actually receive three paychecks in April and September. So if you pay 50% of your car note every two weeks, you’ll actually be paying two extra half payments each year, which adds up to an extra payment every year.

For example:A $500 monthly payment made for 12 months adds up to $6,000 per year 

(500 x 12 =6,000)

But a $250 bi-weekly payment made 26 times comes out to $6,500 per year

(250 x 26 = 6,500).

This technique will also reduce your interest payments over the life of the loan, as you’re decreasing your remaining balance at a faster rate.

3. Round up your car loan payments

Another way to slightly increase your payment schedule is to round up your payment to the nearest $50. For example, if you borrowed $13,000 at a 5% interest rate for 72 months, your monthly payment is $209. On a regular payment schedule, you’ll pay $2,074 in interest over the life of the loan.

If you round that payment up to $250, you’ll pay the loan off at least 13 months earlier and save at least $395 in interest.

4. Review add-ons

You may be slowing down your loan repayment by paying fees for extra items that were included in your original loan contract. To identify these add-ons, take a look at your paperwork. Here are some examples of the items you might find:

  • Guaranteed asset protection (GAP) waivers
  • Service contracts
  • Extended warranties
  • Tire and wheel warranties

Some of these items may still be useful or even necessary, however others could be removed, and you may even get a partial refund or a credit for some of the expenses you already covered as a result. To see what steps you can take to cancel unwanted add-ons, reach out to your lender or dealership.

5. Find extra money

Another way to pay off your debts faster, including a car loan, is to consistently put extra money toward your debt . If you can come up with extra cash, here are a few strategic ways to use it:

Snowball (or avalanche) your debt payments

With the snowball method, you make extra payments toward your smallest debt until it’s paid off. Then, apply the money you were putting toward that debt toward your next largest debt, and continue the pattern until you’re debt-free. This method can be a good choice for people who need motivation to get started, since it results in faster payoff of smaller accounts.

The avalanche method also involves putting extra cash toward one debt at a time, only you’ll start with your highest-interest debt first. This method is better for someone who wants to save the most money on interest charges while paying off debt.

The key to success with either method is to keep it up until your debt is paid off, and resist taking on new debt during this period.

Utilize tax refunds, bonuses and pay raises

Putting tax refunds, bonuses and pay raises toward your car loan may seem painful now — but in the long run, paying off your car loan faster will free up your budget for more enjoyable expenditures, like vacations or dining out.

Applying pay raises to car loan payments is an especially effective method of paying down a car loan. Instead of increasing your spending, arrange to pay the extra income toward your loan until the debt is paid off. Pay raises may not result in a large increase per paycheck, but over time it’ll help bring down your car loan balance more quickly.

Earn additional income

If you can’t find extra cash in your budget to put toward your car loan, try creative ways to bring in some extra money. That could include selling or renting personal items, or finding extra work. Consider some of these options:

  • Rent out a room in your house
  • Do yard work for friends and neighbors
  • Sell items online, like old musical equipment, tools, jewelry or workout equipment. You could even list your second car on Craigslist
  • Housesit or pet sit
  • Take on a temporary side gig that includes tips, like ride-sharing services or restaurant work
  • Apply for a new job or talk to your boss about a promotion or pay increase

Reduce extra expenses

Temporarily cutting out other monthly budget items can also free up cash for your car payment. Can you go without cable or decrease your cellphone data plan? Reducing your restaurant and entertainment budget or forgoing new name-brand clothes or other items for a year can make a big difference in paying off your car loan quickly.

If you’re not sure where to start, take a look at your most recent bank and credit card statements and make a note of each expense you can cancel, reduce or eliminate.

Frequently asked questions about paying off your car loan early


There are several ways to get out of a car loan. You could pay it off, refinance it, sell the car to an individual or dealership or trade in the car for a less expensive vehicle.


When you pay off the car, the lender will send the title or a statement of lien release to you.

In states where the lender holds the title until the loan is paid off, they will send the title to you when you pay off the car, marked as free and clear of any liens. In states where an individual holds the title rather than the lender, the lender will send a document of lien release, stating the car no longer has a lien.


It’s better to pay the principal. The principal is the set amount you borrowed to pay for the vehicle, but the interest fees can change based on how much principal you still owe each month. By reducing the principal early, you reduce how much you have to pay in interest.