Comments on: Reader Question: Should I Pay Off My Car Loan Early?

By: Tom

Tom — Wed, 03 Aug 2011 17:53:55 +0000

Hope the dude didn’t invest his money in stocks since 2007!

By: Kometxxs

Kometxxs — Tue, 08 Feb 2011 02:29:25 +0000

I am in a slightly different situation. I just bought the car on a 60 month loan 3 months ago and now I received some money. If I pay a larger amount back in an early stage of the credit, wouldnt that mean that this extra money goes to the principal and I really save on interests?

By: Cornea503

Cornea503 — Fri, 24 Dec 2010 19:35:00 +0000

Similar situation here. Owe 12k which I have now in addition to cash reserves. Life being as uncertain as it is, I feel it safer to keep the 12k in case of emergency. If things go south in a hurry, you could simply not pay the loan and have the car repoed. I feel that if things are bad enough, the credit score hit from the repo is the least of my worries. Maybe im just a negative person but that’s just how I feel about it. At the end of the day, the 12k represents almost a year in mortgage payments/rent i could use in case of a potential catastrophic emergency. In such case, I rather have a place to live than a vehicle.

By: Brian

Brian — Thu, 28 Oct 2010 21:19:25 +0000

The best answer is never finance a depreciating asset. While that’s the best answer, few people are in the position to pay cash for a car.

Unless you’re trying to build credit history, pay off the loan ASAP IF you have 3-6 mo. cash reserve.

If you don’t have 3-6 month cash reserved, pay yourself the difference first (saved in an interest bearing cash account), then pay off the loan making double payments, etc.

By: Anuj

Anuj — Mon, 18 Oct 2010 20:01:16 +0000

Clearing off the car loan sooner, will, in fact, lower your score. Mine dropped to 709 from 735.

But realize – future lenders will not just look at your credit score, but also your credit history. That is where you will stand to gain when they see a ‘Paid off ahead of loan maturity time’.

Hope this helps!
- Anuj
Boston, MA

By: PF

PF — Wed, 29 Sep 2010 14:09:47 +0000

Great analysis all! I am in same situation and this analysis helps very much. I agree with Shawn re the interest savings — depends on the loan amortization (where you are in the loan term). I’m in year 4 of a 5 year loan. My balance is $9k from a $22800 car loan, after 3 years! I ran the amortization (find any loan calculator online) and the early years of course were all interest but now that I’m in yr 4, it is mostly principal I’m paying and very very little interest. Here’s my numbers for example:
total loan: $22,790, 5 year term, interest 8.89%, monthly payment $474.
Interest Principal
Year 1: 1697 3987
2 1504 4179
3 1117 4567
4 694 4990
5 232 5067

You can see that the interest in the later years is much much smaller. So, if I pay the loan off now in year 4, it’s not like I’m really saving 8.89% NOW. I’m saving peanuts now, comparably, and would be giving up my cash position. I’m not sure it is worth it. (Had I the money in the earlier years as I do now, I would have paid it off sooner, but just wasn’t the case.)

The only reason I am tempted to pay off the loan now is to improve my credit score, but I am getting mixed messages about whether that helps or hurts my score. My current score is 700 and I would like to be over 720. I would say that I have enough history so that is not a problem, but having lower debt may in fact raise my score overall.

Anyone?

By: GEO

GEO — Sun, 11 Jul 2010 14:43:02 +0000

paying it off early won’t do much if anything for your credit score but its always good to not be in debt. though if you don’t have much of a credit history keep the loan and just pay a lil extra each month to pay it off faster.it will show you make your payments on time and don’t miss by keeping it open.

the huge thing I see that has been left out of this convo is how new is the car and etc.cars over time need maint. factor that in and this changes things alot.I wish I had paid my car off when i first got it then used the money to buy a cheaper car that was very decent then let the rest of the money sit in a savings or etc.

By: LEO

LEO — Tue, 23 Feb 2010 05:22:16 +0000

I’ve been paying on my auto loan for 4 yrs now and have one year left, and I’m about to pay off the loan in total to avoid the interest. my question is how much well my credit jump if any if I do so, by paying the loan off?

By: Shawn

Shawn — Mon, 11 Jan 2010 23:19:04 +0000

Has anyone taken into consideration that with car loans you pay the interest at the beginning of the loan. So, once you’re interest is paid, all you are payment is going to principal and you really save nothing but the monthly payment every month if you pay it off?? From a saving money standpoint, there’s no gain once you cross that threshold. From a want to be out of debt standpoint, absolutely pay it off if you have the means. But I’d figure out where you are on that threshold before dumping money to pay it off, especially if the montly payment isn’t an issue and you could be making money on your payoff money instead.

By: illini

illini — Sat, 24 Oct 2009 03:17:09 +0000

Alexa,

Since the car depreciates even if you own it out right, it doesn’t really change the math. Paying off the car is going to save you money. The decision really is if you’re comfortable with less cash in the bank.