How to Pay Off a Car Loan Early

Paying off your car loan early can save hundreds of dollars on interest charges and reduce your debt-to-income ratio. There are many ways to pay your loan off early depending on your personal finances and loan terms. Make biweekly payments, apply additional money to the principal balance or use money from your savings account to help.

Instructions

1. Compile the present value of the loan balance, interest rate and remaining months on the loan term. This is the basic information you need in order to use any online debt calculator.

2. Look over your loan documents to determine if you have a simple interest loan or a precomputed interest loan. Paying a simple interest loan off early will save you money. If you have a precomputed interest loan then all of the interest was added to the loan at origination. Paying this loan off early won't save you interest but will reduce your debt.

3. Review your loan paperwork, and determine if there are penalties for paying your loan off early. This allows you to determine if the amount you save by paying the loan off early offsets the possible charge you'd incur.

4. Determine where additional funds are applied if you pay more than your minimum payment. Direct the bank to apply any additional funds to the principal balance.

5. Calculate the additional funds you can apply toward your car loan. Look over your monthly budget and see if you can cut back anywhere to make larger payments on your loan.

6. Make payments biweekly to save on interest. This is also a great way to get ahead if you're paid every two weeks rather than twice per month. Paying biweekly allows you to make one additional payment per year.

7. Check your savings account and see if you have any additional funds you can put toward your car loan. If you have enough to pay the loan in full then you'll need weigh the pros and cons of not having as much in liquid assets as opposed to being out of debt.

8. Contact your bank for a payoff amount if you have the funds to pay the present value of your loan in full.

9. Write a check or send an electronic payment to the lender. Once you've paid your loan off the bank will send you the title to your car.

Tips & Warnings

• Make sure the bank has your most recent address so you get the title to your car in a timely manner.

• Keep the title to your car filed in a safe place and not in your car. It's your proof of ownership in case the car is stolen.

Resources

• Biweekly payment calculator