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Is it worth to pay off a car loan early?

Have some extra cash and asking yourself 'is it worth to pay off a car loan early?'

Nicholas Hinrichsen - Published: September 24, 2020

'Is it better to pay off a car loan early' really depends on the rate you're currently paying on your car loan! Have a look at the following table to get an idea of the rate you should be paying:

Credit ScoreNew carUsed car
760+2.69%3.49%
700-7603.00%4.25%
650-7005.50%6.50%
600-6509.75%10.75%
550-60015.50%17.50%
Below 55022.00%22.00%

Most likely, your rate is higher than the rate you should be paying. Therefore, step one is to refinance your car loan - the sooner the better to start saving immediately.

If you have some savings put aside and would like to get rid of your monthly car payments, you shouldn't act too quickly. Are you sure you can't find an investment opportunity like investing in the S&P500 that yields a higher return than what you're paying on your auto loan?

If you can find an investment opportunity that pays you a higher return than what you're currently paying as APR, you should not pay off your loan but instead use your money for your investment.

Auto loan rates should be relatively low. Therefore, we recommend you pay off your credit card debt first and look into investment opportunities second before you think about paying off your car loan.

How to pay off a car sooner


If you've read this far, you must be thinking about paying off auto loan early. To pay off your car loan early, you need to follow these five steps:

  1. Obtain your payoff amount (loan amount balance plus a few small fees)
  2. Determine the date until your payoff is valid (e.g. 10 days from your request)
  3. Find out the per-diem (daily interest your loan accumulates)
  4. Pull up your account number (the new lender needs that to payoff your loan)
  5. Confirm the payoff address (where to mail the check to)

All the above information can be found on the official payoff statement of your existing lender. The next step is to locate the document. You have three ways to locate the payoff statement:

  1. Call customer service at the 1-800 number and ask to be connected to the loan payoff department for a verbal payoff.
  2. Log into the online banking of your lender and browse to the 'Loan Payoff' tab. You will be able to download a PDF.
  3. Call customer service at the 1-800 number and ask the operator to fax you your payoff statement


Should you pay off your car loan early


When talking to your lender, don't make the mistake of asking them 'should you pay off your car loan early'. They will talk to you out of paying your loan off early because paying off car loan early means they make less money off of you.

There's two cases worth talking about:

You're paying the entire loan balance off. In this case:

  • Auto loans don't have an early repayment fee. That means, you can pay a loan off whenever you want.
  • Lenders, however, suffer losses when you pay off your loan early. Therefore, the lenders usually make it very inconvenient for you to pay off a loan.

You want to make additional principal payments or pay only part of the loan off? In this case:

  • The lender will not apply your payment to the principal but instead shorten the loan.
  • That means, your monthly payments will stay the same but the loan term shortens.


Instead of paying off, refinance your loan!



Haven't explored refinancing yet?
WithClutch.com is a fully digital platform that lets car owners like you do so from the comfort of their own home. No need to set a foot in a bank or credit union. You can lower your rate or get cash in as little as 20 seconds.

Follow three simple steps to refinance your auto loan, get approved in seconds and save thousands in minutes.

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