How to Pay off Your Car Loan Early

If your finances have taken a hit from the pandemic, you may be looking for ways to reduce monthly expenses and get back on track. Since it likely makes a significant portion of your monthly expenses, paying off your car loan early could be a step in the right direction. Before you plan for how to pay off a car loan faster, it’s important to consider all the factors that determine whether getting rid of your car loan makes good financial sense right now.

In this article

    The pros and cons of paying off a car loan early

    Although eliminating debt may always seem like a good idea, there are several pros and cons to consider before taking action to pay off your car loan.

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    • You can eliminate debt: Getting rid of your car loan can decrease your monthly expenses, allowing you to save money or focus on paying other debt down faster.
    • Interest may be reduced: Since interest typically accumulates over the life of the loan, paying your loan off early will often reduce the total amount of interest paid.
    • Lien on your vehicle will be removed: Car loans are secured, meaning the financing company will use your vehicle as collateral and attach a lien to your title to prevent you from selling the vehicle while money is still owed. Once the loan is repaid, the lien will be removed, and the car will be yours, free and clear.
    • Your debt-to-income ratio will improve: If you are planning to buy a house soon, mortgage companies will look at your debt-to-income ratio to ensure you can afford a home. Paying off large debts like a car can improve your debt-to-income ratio, thus putting you in a better financial position.


    • You may need to refinance: Not all lenders allow penalty-free early payoffs or partial payments towards a loan. In order to get terms that make a payoff worthwhile, you may need to refinance your existing loan.
    • The total loan balance may stay the same: Some lenders use precomputed interest, meaning that all of the interest for the life of the loan is tallied and applied to your account before you ever make the first payment. In this arrangement, lenders will apply any extra payments to pay down the interest first, so paying your loan off early won’t save you any money.
    • Your credit score may drop: Although it might be nice to have one less bill to worry about, paying off your loan can actually cause your credit score to drop in the first few months.
    • There may be early payoff penalties: Some financing companies charge early payoff penalties when a loan is paid off before the original payment schedule, so be sure to check with your lender on any fees that may apply.

    How to pay off your car loan early, step by step

    Since an auto loan is secured by your vehicle, paying off your loan involves more than simply submitting your payment. When paying off a car loan early, take the following steps to make sure everything is properly documented and all rights to your car return to you.

    1. Call your lender and request a payoff balance. Be sure to ask how long this payoff balance is valid, since the interest may accumulate daily on your loan.
    2. Send payment for the exact payoff balance to your auto loan company. If you are making an online payment, take note of the processing date and make sure it is before the expiration date of the payoff provided by your lender. If you are mailing a payment, verify the delivery date to make sure it arrives before the payoff expiration date.
    3. Once your payment has been received and processed, contact your lender to request a release of the lien on your vehicle and a completed loan payoff letter.
    4. After receiving the release of lien on your car, take your car title, loan payoff letter, and release of lien to your local Department of Motor Vehicles to request a new title that officially removes the lien.
    5. Keep copies of all paperwork for your records.

    Benefits of refinancing your car

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    If paying off your car loan under its existing terms isn’t feasible, you may need to consider refinancing the loan. Refinancing can lower your interest rate, giving you an alternative way to save money over the life of your loan. If customer service isn’t ideal with your current lender, refinancing through a different company also provides a way to get out from under your current loan.  Keep in mind that most lenders won’t refinance a car over seven years old, so it’s important to start the refinancing process sooner rather than later.

    Hacks for paying your car loan faster

    If you don’t have a lump sum needed to pay off your loan completely, it may be time to consider alternatives for how to get rid of a car loan. While these hacks won’t be quite as fast as paying off the balance immediately, they can still shave months to years off your car note and save you hundreds, or even thousands, of dollars in interest. To pay your car loan faster, try these creative strategies.

    • Refinance and keep the same payment. Refinancing is typically done to take advantage of lower interest rates, either because your credit improved allowing you to qualify for a lower rate or because rates have dropped in general. If your interest rate decreases, your monthly payment will decrease accordingly, giving you a great opportunity to frontload your repayments. For example, if a refinance drops your monthly payments from $350 down to $275 per month, continue paying $350 and drop the extra $75 per month towards paying off your principle even faster.
    • Pay half of your monthly payment twice per month. This hack works especially well for people who are paid biweekly. Instead of making one monthly payment of $300, make payments of $150 every other week. This strategy won’t increase your monthly budget and paying early can often help you save on the interest that accumulates throughout the month. In addition, since there are 26 pay periods each year, you’ll end up making one full monthly payment extra every 12 months.
    • Get a side hustle. Side hustles are flexible ways to earn additional income that isn’t needed for your regular monthly expenses. This can include babysitting, teaching piano lessons, delivering groceries or taking on freelance work. If you choose something you enjoy, it won’t even feel like work and you can devote any extra earnings straight towards repaying your car loan.
    • Look to your other bills for savings. If you’re stuck in a loan that seems problematic for refinancing or other early payoff options, look for savings in your other monthly bills instead. Cut out unnecessary entertainment plans or switch to a cheaper package. Then apply those savings directly to your auto loan.

    Things to keep in mind

    Many people pay off a car loan early hoping for a quick boost to their credit score. In reality, paying off your car loan can actually lower your score, at least in the short term. While it will look better in the long run to the credit bureaus to decrease your overall debt owed, the immediate impact to your score is often negative. Paying off your loan closes a sizeable credit line and can decrease the number of different types of credit accounts you have overall, both of which factor into your credit score.

    Before devoting a lot of extra cash to paying down your loan, make sure it’s a good financial move for you personally. Lending companies apply interest in different ways, and some lenders charge hefty fees if you pay off your loan early. Crunch the numbers to make sure that paying off your car loan will save you money and won’t leave you financially strapped if an emergency expense occurs. If the numbers don’t add up, it may be better to focus on paying off other debts or increasing your savings instead.

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    What if you have more than one car you want to pay off?

    Many households have multiple vehicles and multiple car loans to finance them. If you’re currently paying on two vehicles, focus on paying down the balance of one as quickly as possible, since it will be easier to pay off the second once you’ve eliminated one of your payments.

    Start with the vehicle that offers the greatest financial savings based on the terms of the loan. For example, if one car loan has a 10% interest rate and doesn’t charge early repayment penalties while another loan has a 6% interest rate, pay down the higher-interest debt first so more money is freed up to pay off the 6% loan faster.

    Julia Taylor

    Contributing Writer

    Julia Taylor is a freelance writer based in Nashville, TN. She takes complex business, financial, and technical topics and makes them easy to understand. You can find her work published on a variety of business blogs, including Paychex, Kapitus, Sanford Brown, Fortis Educational Institutes, American University of Antigua and

    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Loans Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to,, and elsewhere.