Paying Off Car Loans Early: Benefits

There are many benefits to paying off a car loan early, and depending on your finances, it may be the right thing for you to do. You can pay your loans off early by making additional monthly car loan payments, increasing the amount of principal you pay each month or paying a large lump sum, but is it the right thing to do? Not all loans can be paid off early so you want to be sure that there isn't a penalty for early payoff. If there is, you may actually end up costing yourself more money in the long run. Let's take a look at the advantages of paying off your loan early.

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• The main reason to pay a loan off early is to save money, specifically on the monthly interest. You could save yourself a great deal of money by paying the loan off early, however you need to consider that if you take $12,000 out of an account that is generating interest in order to pay your car off early you lose any interest that would have been gained while that money sat in the bank. Some simple math can tell you what decision will make more money for you in the long run. Additionally, by paying off your car early you may be emptying your savings and that could have an impact at a later date.
• Paying off loans early generally improves your credit score. This can obviously help you in the future if you need to secure another loan. Credit scores also improve when you are making on time monthly payments so in most cases you want to pay 12 to 24 months of payments before paying off the balance in order to ensure you maximize the amount of credit gain.
• Without a car payment you free up much more cash flow every month. This can be important if you are on a tight budget or need the money for another expense.
• Interest on your auto loan is not tax deductible but interest on other loans, such as home equity loans, is. For some people it may be a good idea to take a home equity loan to pay off their car early. Of course this is only moving your payment and debt obligation to a different lender, but you could potentially get a lower interest rate to go with the tax deduction. Be warned that most lines of home equity credit have variable interest rates and while they may qualify for a tax deduction they could increase to the point where you end up paying more for your car than you would had you kept the auto loan.
• If you car is older, or in poor condition, you could save a lot of money on your car insurance by paying off loan. Lenders require that you carry a certain level of comprehensive and collision insurance on any vehicle that has a lien on it. However, if you pay your vehicle off early you can reduce the amount of coverage on it and save yourself a great deal of money every month. Everything from the deductible, glass coverage and liability coverage can potentially be changed.

Paying off auto loans early can be beneficial if you have the money for it, but your personal financial situation will determine what will work for you and what won't.