Should You Pay Off Your Car Loan Early?

Generally, you should pay off a car loan early if you don’t have other high-interest debt or pressing expenses to worry about. But if that money could be better spent elsewhere, paying off your car loan early may not be the best choice.

In the short term, paying off your car loan early will impact your credit score — usually dropping it by a few points. Over the long term, it may rise because you’ve reduced the amount of debt you owe. Whether it makes sense to pay off a car loan early depends on your budget, the loan’s interest rate and your other financial goals.

When does paying off my car loan early make sense?

There are a few scenarios where it might make sense to focus on eliminating your auto loan debt. If one of these scenarios applies to you, paying off your loan early could be a good idea:

• You don’t have higher-interest debt and want to free up the cash for other financial goals.
• The auto loan has a higher interest rate than you could earn by investing.
• You’re hoping to buy a home soon and want to lower your debt-to-income ratio.
• You recently received a windfall and would have enough cash in reserves for emergencies even after paying off the auto loan.
• You want to avoid negative equity or being upside-down on your auto loan.
• You’re debt-averse, and eliminating your auto loan is an important step in obtaining financial security.

Benefits of paying off a car loan early

If you can manage it, paying off a car loan in full ahead of schedule can have some significant benefits.

Save money on interest

Interest is typically spread out over the loan term. Paying off your loan early will save you interest since the lender will have less time to collect it. The more money you add to your payments and the higher your loan amount, the more you can save.

Paying off your loan in a lump sum will save the most in interest, but even an extra payment here and there can make a difference. That extra amount should go directly toward the principal, so specify that intention when you make your payment.

Use an auto loan early payoff calculator to determine how much you can save.

Own the vehicle sooner

Owning your vehicle outright means it’s easier to sell the car or trade it in when the time comes. Until you pay off your car loan, the lender technically owns your vehicle. When you repay the loan in full, you’ll receive an updated title in your name, without the lienholder.

Paying off your car may also mean that you can reduce your auto insurance costs. Many auto lenders require you to carry full-coverage auto insurance to protect their asset. When the lender no longer owns the vehicle, you can switch to liability-only insurance for a reduced cost. But remember: It’s a good idea to keep the protection if you can’t afford to replace your vehicle in case of an accident.

Less risk of being upside-down

Sometimes cars depreciate faster than the payoff schedule of an auto loan. This is especially true if you have a long repayment term or a high interest rate.

Being upside-down on a loan, or owing more on the car than it’s worth, is a tricky situation. You may run into problems if you try to sell or trade in the vehicle, since you won’t earn enough to pay off the loan. Similarly, if the car is totaled, the insurance payout may not cover your debt.

The faster you pay down your auto loan balance, the less risk you run of becoming upside-down on your loan.

Improve your debt-to-income ratio

Your debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes toward debt payments. It helps lenders determine how much you can afford to borrow without stretching your budget to its breaking point. The higher your DTI, the riskier you look as a borrower.

Paying off your car early eliminates your auto loan from the equation. Your DTI ratio will drop, which can improve your chances of qualifying for other loans or consolidating credit card debt at a lower rate.

Free up money for other expenses

The average monthly payment on a new car was $745 in the first quarter of 2025, according to Experian’s quarterly report. Used cars were more affordable, but the average monthly payment was still a budget-busting $521.

Paying off your car loan ahead of time frees you up to make progress on other financial goals. If you keep the car you have and don’t take out another loan, you can put that money toward vacation savings, retirement funds or other debt.

Disadvantages of paying off a car loan early

Prepayment penalties and closing accounts may impact your finances. While there are pros to accelerating your auto loan payments, there are also some potential downsides to keep in mind.

Possible prepayment penalties

Some lenders charge a fee called a prepayment penalty for paying off a car loan early or making extra payments. Check your loan contract to see if your lender has one.

The good news is that this type of fee is increasingly uncommon. If your lender does charge a penalty, compare your potential interest savings with the cost of the fee — it may still make financial sense to pay the loan off early. If the penalty costs more than any savings you’d earn, just continue paying down your loan on time and put your extra money toward something else.

Lower credit score

When you make the final payment on a loan, you’ll stop earning credit for making on-time payments. Plus, your credit mix could be affected since credit bureaus like to see both installment loans, like auto loans, and credit lines, like credit cards.

But don’t let the fear of a credit score impact hold you back from paying off your auto loan early. This potential dip is usually slight and temporary, and if you continue to manage your credit accounts responsibly, it shouldn’t have a meaningful effect.

Money better spent elsewhere

If you have higher-interest debt, you may be better off focusing your efforts on those loans or credit cards first. That’s especially true with credit cards, certain personal loans and short-term debt. Consider the APR and fees you’re paying on your other debt, compared to what you pay on your auto loan.

Even if you don’t have high-interest debt, your money may be more effective if put toward retirement, a Health Savings Account or some other tax-advantaged financial account. The same may go for general investing if your auto loan interest rate is low.

May not fit in your overall budget

If your budget is tight, finding extra cash to put toward your auto loan payment each month may be impossible. Even if you can cut back on certain expenses, other areas of your financial life (such as paying down high-interest debt, saving for retirement and building an emergency fund) may be more important.

Before deciding to pay off your loan ahead of time, examine your budget and make sure it won’t place you in an even more precarious situation.

How to pay off a car loan early

Depending on how much money you have on hand, there are three ways you can work toward paying off your car loan ahead of schedule.

1. Pay it off in full

If you received a big bonus at work or a sizable tax refund, or simply want to use money you’ve been saving, you can make a lump-sum payment to pay off your car loan in full.

Start by calling your lender to determine the 10-day payoff amount, which includes interest that’s accrued since your last monthly payment. Then send a check to the lender or make an online payment to bring the balance to $0.

2. Pay down the balance

If you don’t quite have enough money to pay off the entire balance, you can still make a large payment to pay down a big chunk of it. This won’t reduce your monthly payment, but it will move your paid-in-full date up, meaning you’ll be out of debt sooner. And since it will go toward the principal, you’ll pay less interest overall. Be sure to indicate that the money should be applied to the principal balance.

3. Increase your monthly payment

If you don’t have a chunk of cash to put toward your auto loan, consider making larger payments each month instead. The more you pay each month, the faster you’ll pay off your loan — but even a small amount of extra money can save you on interest.

Bottom line

Paying off a car loan early can save you money — provided the lender doesn’t assess a large prepayment penalty and you don’t have other high-interest debt. Even a few extra payments can go a long way to reducing your costs.

Before rushing to repay your auto loan, run the numbers to determine whether it makes financial sense or if you should apply extra funds elsewhere. Early payoff is not the only route to lower costs. Refinancing your current loan can help you secure a manageable monthly payment.

The key to success is to keep your financial situation and goals in mind as you weigh the benefits and drawbacks to determine the best strategy for you.

Frequently asked questions

• Is it better to pay off my car early or keep money in savings?
  

  The answer depends on your financial situation and goals. If you have an emergency savings account with three to six months of expenses and no high-interest debt, it can make sense to pay off your car early, particularly if you’d like to lower your debt-to-income ratio or free up cash for other needs.

• Why did my credit score drop after paying off my car?
  

  Paying off a car loan eliminates the loan from your credit profile, causing your score to drop temporarily. One reason this can happen is that removing the loan from your credit profile can cause the average age of your credit history to drop, particularly if you’d been paying on the loan for many years. The good news is that the long-term effect of debt payoff is generally positive, even if you see a credit dip in the short term.

• What is the penalty for paying off a car early?
  

  Although this is increasingly uncommon, some lenders charge a prepayment penalty for paying off a car loan early. The exact penalty amount depends on the terms of your loan contract, but some lenders may charge 2 percent of your outstanding balance. Weigh the cost of the penalty against your interest savings to determine whether it’s financially smart to pay off the loan early.