At some point while paying on a car loan, anyone who has extra cash asks themselves: “Should I pay my car off?”
It’s an easy question to answer once you look at the facts, including your amount of cash, your credit score and your other debts.
Before deciding whether to send in extra money on your car loan, consider the following.
Yes Pay My Car Off
When asking, “Should I pay my car off,” there are many variables involved. But the following are typically good scenarios for throwing more money at the loan and paying it off faster.
Saving on Interest
Interest on your car loan is calculated based on the outstanding balance. By sending in extra cash each month, you can lower the amount you pay in interest. There are many online calculators to determine how much you can save. Make use of them and determine if the overall savings are worth putting extra money into the car loan.
Saving on Insurance
Having a car loan paid off typically lowers the monthly cost to have car insurance. Check with your insurer to determine what the difference will be and decide whether it’s worth paying off the loan early.
It’s Your Highest Interest Debt
The debts with the highest interest rates are the ones you want to go after first. In many cases, these are credit cards (see below). Before paying extra for a car loan, you also want to make sure you have set cash aside for emergencies. But if that is established and your car loan is your highest interest debt, it’s likely worth paying extra each month.
Not owing money to anyone is a liberating feeling. It allows you to use your money as you want. That includes saving cash and setting aside money for hobbies and travel. It also allows you to set aside money for you next car, which you will need to buy, eventually.
Don’t Pay My Car Off
There are some situations where paying off a car loan early does not make good financial sense. They include the following. All of these assume that the car loan is at a relatively low interest rate.
Tight Cash Flow
If sending extra money to your car payment is going to leave you with too little cash for monthly expenses or keep you from setting aside some money for savings, then it’s best to just stick to the payment plan. For example, you don’t want anything to keep you from creating an emergency fund of three to six months-worth of expenses.
High Interest Credit Cards
If you have debt on high-interest credit cards, then paying them off first is a priority over paying off your car loan early. The higher interest rates on credit cards make it more difficult to keep up with payments, much less pay them down. It also hurts your credit score to have high balances on your credit card. Paying down high-interest credit cards needs to be the priority if you have extra cash.
If you bought the car with less-than-great credit, paying it back can help reestablish your credit score. The ability to pay back an installment loan with regular monthly payments is one of the areas credit agencies look at to establish your credit score. If that is the case, keep making the slow and steady payments and use the extra cash elsewhere.
These are some of the considerations before deciding to pay your off. Assess your situation and make the move that makes the best financial sense for you.