Imagine you’re doing really well at work or you received a tax refund, and now you have enough money in your bank account to pay off your car loan in full.
It’s an alluring move because you’ll have one less bill to pay each month, save a few hundred dollars on interest, and eventually receive the title to your car from your lender, allowing you to drop full coverage auto insurance. It might be worth paying off your car loan early.
However, even if you are able to repay your loan in full, there are also significant benefits to adhering to your repayment plan.
Unquestionably, buying a new car has its appeal, but the financial commitment can be intimidating. If you’re thinking about financing your next car purchase, you may be wondering if it makes sense to obtain dealer financing and then promptly pay off the debt.
The Pros and Cons of Dealer Financing
Pros:
- Convenience: Dealer financing offers a one-stop shop for your car purchase and financing needs. You can handle everything in one place, saving you time and effort.
- Potentially lower interest rates: Dealerships often have relationships with multiple lenders, which can give you access to competitive interest rates.
- Negotiation leverage: Using dealer financing can give you leverage to negotiate a lower purchase price for the car.
Cons:
- Hidden fees: Dealer financing agreements can sometimes include hidden fees, so it’s important to read the fine print carefully.
- Higher interest rates: Dealer financing interest rates may be higher than those offered by banks or credit unions.
- Prepayment penalties: Some dealer financing agreements may include prepayment penalties, which means you’ll have to pay a fee if you pay off the loan early.
Can You Finance a Car and Pay It Off Immediately?
Yes, you can absolutely finance a car and then pay it off immediately. This strategy can be beneficial if you can secure a lower interest rate through dealer financing than you could get on your own. However, it’s important to consider the following factors:
- Prepayment penalties: Make sure the loan agreement doesn’t include any prepayment penalties.
- Early payoff process: Understand the process for making an early payoff. Some lenders may require you to send a written notification or make the payment in person.
- Impact on credit score: Paying off a loan early can have a positive impact on your credit score, but it’s important to note that the effect may be minimal.
Is It Worth It to Get Dealer Financing and Pay It Off Immediately?
Whether or not it’s worth it to get dealer financing and pay it off immediately depends on your individual circumstances. Here are some factors to consider:
- Your credit score: If you have a good credit score, you may be able to get a lower interest rate from a bank or credit union than you would from a dealer.
- The interest rate offered by the dealer: If the dealer is offering a competitive interest rate, it may be worth taking advantage of their financing.
- The presence of prepayment penalties: If the loan agreement includes prepayment penalties, it may not be worth it to pay off the loan early.
The Bottom Line
Getting dealer financing and then paying it off immediately can be a viable option if you can secure a lower interest rate and avoid prepayment penalties. However, it’s important to carefully consider the pros and cons and compare your options before making a decision.
Additional Tips
- Shop around for the best interest rate: Don’t settle for the first offer you receive. Compare interest rates from multiple lenders, including banks, credit unions, and online lenders.
- Read the loan agreement carefully: Make sure you understand all the terms and conditions of the loan agreement before you sign.
- Consider the total cost of the loan: Don’t just focus on the interest rate. Consider the total cost of the loan, including interest, fees, and any other charges.
You can decide whether or not to obtain dealer financing and pay it off right away by using the advice in this article.
So, Should You Pay Off Your Car Loan Early?
Let’s review some of the advantages and disadvantages of paying off your car loan early. I’ll also throw in a few other minor considerations I haven’t mentioned yet.
If I Pay Extra on My Car Loan Does It Go to Principal?
Since auto loans are amortized, a portion of each monthly payment is applied to principal and a portion is applied to interest.
What happens to the extra $500 if you pay $1,000 next month instead of $500? Does it go toward principal or interest?
Though each lender is unique, many will just say, “Gee, thanks!” when they see the extra cash and allocate more of it toward interest (i e. , pay themselves).
However, you are free to ask your lender to “apply this to my principal so I can pay off my loan faster”—in fact, doing so is encouraged. ”.
The majority of lenders will include a checkbox where you can designate that additional payments should be applied to your principal. Check your loan documents or just give them a call to find out what their process looks like.
Is it good to pay off a car loan early? | Paul Hutchings
FAQ
Can you pay off a financed car immediately?
How soon is too soon to pay off a car loan?
Can I pay off a car finance early?
Is it smart to pay off car ASAP?
Should I pay off my car loan immediately?
Answer provided by. “Unless the loan has prepayment penalties, you shouldn’t have any problem paying off the car loan immediately. However, if you pay off the loan after a month, don’t expect the dealership to do you any favors afterward.
What happens if you pay off a car loan early?
Some lenders charge a penalty for paying off a car loan early. The lender makes money from the interest you pay on your loan each month. Repaying a loan early usually means you won’t pay any more interest, but there could be an early prepayment fee. Does it hurt to pay off a loan early?
Should you pay off your car loan in 4 years?
If your car loan is a simple-interest loan, you pay interest based on what you owe at a given time. The sooner you pay off the loan, the less you’ll spend on interest — potentially saving you hundreds of dollars. If you paid off your $20,000 loan in four years instead of five, you would end up paying $2,108 in interest — a difference of $537.
How do I pay off my car loan early?
One way to pay off your car loan early is to make one lump payment. Contact your lender to find out your car loan payoff amount and ask how to submit it. The payoff amount includes your loan balance and any interest or fees you owe. You can also pay more than the minimum amount due each month.