Paying off your auto loan early can have some big benefits – but is it right for you?
The answer to that question depends on many factors, including the interest rate and terms of your loan, your financial goals, your other debt obligations and your budget.
First, you should check to see if your loan contract stipulates that a fee or penalty be paid for paying it off early.
If there is an early payoff fee or penalty, you’ll have to do the math and see if the potential savings of paying it off early outweighs the penalty or fee.
If you’re carrying massive credit card debt, it likely will be better to tackle that debt first. Once that is conquered, that could free up even more money to help you pay off your auto loan faster.
But if there’s not an early payoff fee or penalty, and you don’t have a lot of credit card debt, then in most instances, paying off your auto loan early will be beneficial to your financial well-being.
Firstly, paying off your loan early assumes you already have an emergency savings account. If you don’t have money for unexpected emergencies, you should instead take the extra money you would use to pay off your loan and instead secure funds for an emergency savings account.
But if you do already have an emergency savings account, paying off your car loan early will lower your debt-to-income ratio. A lower DTI will improve your credit score and can help you qualify for lower interest rates if and when you need to borrow money.
Paying off your auto loan early also can help you make progress toward other financial goals you have. Saving for a dream vacation? You can make that a reality quicker without an auto loan payment. Wanting to boost your retirement? Putting that money into your retirement fund likely will pay off in the long run.
You can always talk to a financial advisor to get an expert opinion on the best way to meet your financial goals.
Financially Fit is your home fitness guide for all things financial, provided by RCB Bank. Find money-building tips, insights and inspiration to help you improve your financial well-being at RCBbank.com/GetFit. Opinions expressed above are the personal opinions of the author and meant for generic illustration purposes only. Member FDIC.