Is repaying a car loan in advance a good idea? The pros and cons


Paying off your car loan early might be a good idea, but it might not be.

The truth is that in some cases auto loan debt clearing can be a wise option and can improve your financial situation. However, in others it can have the opposite effect and impact your ability to pay things or pay off other forms of debt.

Basically, it all depends on you and your financial situation.

So what is the right choice for you? This is where our list of pros and cons comes in handy! Read on as we weigh the pros and cons of paying off a car loan in advance …

Repay your car loan in advance: Advantages

Repaying your car loan in advance has many advantages, here are some of them:

  • Debt cleared: Ultimately, wiping off any kind of debt is a good thing, because it means you don’t owe any money to a bank or lender. By paying off what you owe, you can turn to your savings or even borrow for something else, like taking out a home loan.
  • Improves Your Credit Score: Paying off your debt in advance can look good on your credit report because it lowers your debt-to-income ratio. By improving your credit, you not only increase your chances of being approved for future loans, but you can also benefit from lower interest rates through risk-based pricing.
  • The vehicle is no longer under warranty: Since most auto loans are secured personal loans, the car you bought with the loan is likely being used as collateral. By prepaying your car loan, you no longer owe your lender any money, so they no longer need to hold your asset (the car) against the loan as collateral.

Repaying your car loan in advance: the disadvantages

The truth is, there are also a few downsides to paying off your auto loan debt early, including:

  • Prepayment charges: Some auto lenders charge hefty exit and prepayment penalties to borrowers who pay off their debt before the end of their loan term. In some cases, these types of fees can cost hundreds of dollars.
  • Impact on your budget: While paying off debt is an important part of financial health, it’s also important to remember that paying off a loan shouldn’t come at the expense of your budget. Determine if you can actually afford to prepay your loan, this could be delaying the prepayment or even just sticking to your regular repayment plan and making extra contributions occasionally.
  • Other debts can cost you more: By prioritizing prepayment on your car loan, you actually risk being charged interest on other high-interest products that you haven’t paid off, like a credit card. It’s important to look at all of your financial products and prioritize which debts to settle first by determining which ones will cost you the most.

So what are the take home messages for finding the right auto loan in the first place?

1. Choose flexible repayments: Look for a loan with the option of making weekly, bi-monthly, or monthly repayments, as well as the option of making additional repayments. A reprint feature can also come in handy in case you need to tap into your additional contributions later.

2. Avoid prepayment penalties: As mentioned, lenders may charge a prepayment fee, so try to find an option that doesn’t come with these fees in case you write off your debt up front.

3. Get a low interest rate: The lower the interest rate, the better, as it can lower the cost of your loan overall (because you pay less interest). By getting a lower rate, you can also pay off your debt faster, as more of your repayment is spent on the amount you borrowed rather than what you owe the lender in interest.

4. Choose a short term loan if you can: If prepaying your loan doesn’t seem like an option for you, choosing a shorter loan term will pay off the loan faster than opting for a longer term. This way your regular repayments would be higher, but it would mean that you would pay less interest because you are paying interest over a shorter period.

Ready to start comparing auto loans? Check out these killer options below or head to our auto loan comparison page for even more!

Mozo provides general product information. We do not consider your personal goals, your financial situation or your needs and we do not recommend any particular product to you. You should make your own decision after reading the PDS or offering literature, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we do not cover all products on the market. If you decide to request a product through our website, you will be dealing directly with the supplier of that product and not with Mozo.


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