Does Paying Off Auto Loan Early Hurt Credit
Asked by: Cornell Frami Jr.
Paying off a car loan early can temporarily affect your credit score, but the major concern is prepayment penalties charged by the lender. … They do this to make up for the money they’ll lose by not collecting the long-term interest on your loan. Be sure to check with your lender before you make an early pay-off.
Switch To Biweekly Payments
Biweekly payments simply make more sense for the average worker, who gets paid biweekly. You can schedule your payments to coincide with your paychecks.
Specifically, split your monthly payment in half and set up automatic payments every two weeks. It may seem like youd just be paying the same amount each year. But you really make 26 half-month payments each year, or 13 months worth of payments each year rather than 12.
You get to pay off your car loan early without even noticing the impact on your monthly budget.
You could also pay more than a half-month payment every two weeks to pay off your loan even faster.
Refinance Your Current Car Loan
What about trying to negotiate a better car payment? While you might be able to lower your interest rate or get a slightly lower monthly payment by refinancing over a longer term, youre only addressing a symptom of a much bigger problem. Having a car payment keeps you in debt and paying way more for a car in the long run than you should. Not. Worth. It.
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Should I Pay My Car Loan Off Early
To recap what weve covered, you should try to pay your car loan off early if you have a high-interest auto loan and no opportunity to refinance. Even if you have a low interest rate, you can get out of debt faster if you pay off your car loan early.
Once youve paid off your loan, make sure to tell your car insurance company so you can remove the lien holder from your policy. You can contact them right after the loan is paid off, so you dont need to wait until you have the title to make the call.
If you decide to pay your car loan off early, hopefully you have some good strategies that youre ready to implement.
When Should You Break Your Lease
Breaking your car lease may be a good idea if you want another car or no car at all and you can save more money by doing so. If youre looking for another car to replace your lease, use the 20/4/10 rule as a car-buying guideline: You should put 20% down, finance for no more than four years and keep total transportation costs to under 10% of your budget.
The best way to get a good deal on your APR in a new car loan is to shop around. You wont hurt your by applying to multiple lenders for an auto loan any more than you would if you applied only once as long as you submit all your applications within a 14-day window.
Possible lenders include your bank or credit union. Consider filling out an online form at LendingTree, which could provide up to five potential auto loan offers from lenders depending on your creditworthiness.
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Option #: Pay Off The Loan
Easier said than done, right? The average used car loan was $20,554 in 2019, according to a recent Experian study. If you had enough extra cash lying around to pay off the loan, chances are you would have already done it by now.
There is one way to raise enough money to pay off the loan, though: by selling the car. This might be tough if youre attached to the car, but consider the consequences if things go bad. If the other person decides to skip town and stop paying, then you could be on the hook for the payments.
Again, if you have a co-borrower, youll need to get their permission before you sell the car because legally, its their car too.
Frequently Asked Questions About Selling A Financed Car
Is it illegal to sell a car with a loan on it in Canada?
Its not illegal to sell a financed car in Canada, but be sure to provide correct information about your car so you dont find yourself in legal trouble. Keep these points in mind:
- Potential buyers will check if there are any liens on a vehicle before buying. Very few people would want to buy a car that still has a loan on it, so your options are limited.
- You should contact your lender and let them know that you plan to sell your financed car. Your lender will let you know the amount you have left to pay and the window of time you have to pay off that total amount. If you manage to find a buyer for your car, you can use the money you receive from your buyer to pay off the remainder of your loan, but if that money is still not enough, your lender will require you to cover the rest.
I owe money on my car. Is it better to sell it privately or to a dealership?
It depends. You may be able to get a better price selling your car privately, but the outstanding loan on it may make selling the car a real headache and turn private buyers away. To avoid this hassle, you may just want to sell your financed car to a dealership.
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Make Payments On Your Extra Pay Periods
If you want to make additional payments but feel like you cant commit to a biweekly payment, think about making additional payments on your extra pay periods. You might already use your extra paychecks to buy new clothes or treat yourself to a spa day, but consider giving them a new use and pay off your car loan debt. You will be able to make plenty of fun purchases without worry once your loan is paid off!
Ways To Pay Off A Financed Car In A Private Sale
Thinking of selling your financed car privately? Here are 3 options for paying off your current loan:
1. Sell your car and use the money to pay off the loan
This is the easiest option for selling a financed car when moneys tight, but you need to earn the trust of your buyer for them to give you their money so that you can pay off the loan.
- Be direct and honest. Let the buyer know you owe money on the car and that youll pay off the loan in full immediately after the transaction. For peace of mind, offer to bring the buyer to the bank or lender and clear the debt in front of them. Get a copy of the vehicles history report from a company like CARFAX and show the buyer that there is no outstanding lien on the car. If youre selling a car in Ontario, the Provincial Government actually sells used vehicle information reports for a nominal fee of about $20.
- Profit or loss? Look at how much you can sell the car for and how much itll cost to repay the loan fully including any early repayment fees and other costs. This will give you an idea if youre going to gain or lose money from the sale.
How much should I sell my car for?
2. Refinance your car loan before selling
Need extra cash? Refinance instead of selling.
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How Do I End My Pcp Agreement Early
Your PCP agreement can be voluntarily terminated as long as youve paid at least 50% of the total finance amount back to the finance company. The total finance amount includes any interest and fees that you need to pay as well.
Most importantly, this total also includes the balloon payment. This is crucial because it means that you likely wont have paid back 50% of your total finance agreement midway through your monthly repayment schedule.
As well as having repaid 50% of the total finance amount, you need to have taken good care of the car, meaning theres no damage other than general wear and tear. If you want to know exactly what is considered to be acceptable condition, you should refer to the fair wear and tear guide, issued by your finance company. To protect yourself against potential damage charges, you should take dated photographs of the car when you hand it back.
If you have these boxes ticked, then youre all clear to cancel the agreement. However, if you havent repaid 50% of the total finance amount, you can still end the agreement if you pay off the difference. So, if youve paid back £15,000 out of a total of £40,000, you would have to pay off £5,000 to terminate the agreement.
Why Do You Want To Cancel Your Car Loan
Determining the best course of action to get out of an unwanted car loan largely depends on why you want to be done with this situation. Let’s look at some scenarios, and what you can do to effectively “cancel” your auto loan:
You can see from this list that you have several options for getting out of an auto loan that isn’t working for you, as long as you do it the right way. Whatever your reason for wanting to be out of your car loan, it’s important that you keep communicating with your lender throughout the process.
One situation you don’t want to find yourself in is when your lender doesn’t know you’re looking to make a change. This could result in loan default if you stop making payments, and ultimately, repossession. Repossession negatively affects your credit score, and stays on your credit reports for seven years.
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Voluntarily Surrender The Vehicle
If you’ve defaulted on your auto loan, the lender may choose to repossess the car. The process isn’t pleasant, and it can wreck your credit score. If you want to avoid repossession, but you have no other options, you can voluntarily surrender the vehicle to your lender.
A voluntary surrender allows you to return the vehicle to your lender on your terms, and while it can damage your credit, it won’t have as big an impact as a repossession. You’ll also be able to avoid certain repossession-related costs, which lenders may choose to add to what you owe. If you feel as though this is your only option to avoid a repo, contact your lender to set up a time and a place for the vehicle to be turned in.
How Do I Decide Whether To Pay It Off Early
If you have the money to pay off your car loan early, and particularly if your interest rate is high, you might want to do it. Give some thought to where you stand on other financial goals, such as having an emergency fund, before you commit your money. And think about whether your car loan qualifies as good or bad debt.
If you decide not to devote the money to ending your loan but worry about a high interest rate, you may be able to refinance your auto loan and save money. Try not to extend the length of the loan when you refinance unless your finances have changed and the old payment has become unmanageable. Extending the loan will almost certainly increase the amount of interest you pay.
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Can You Sell A Financed Car
Yes, you can sell a car with a loan on it. But as long as the loan exists, the lender has a lien on the car, meaning the lender has first rights to the car until you fully pay off the loan. If you default on your loan after selling the car, the car could get repossessed from the person you sold it to. Because of that, most people are wary about buying a car with money owed on it, so it can be hard to find a buyer. Thats why its best to pay off your car loan before selling.
What Should I Know Before I Apply For Car Finance
As a rule, always read the small print before you enter into any finance agreement. Some lenders charge extra fees for you to cancel early, so its best that you check this out from the get-go. Terms like these will be detailed in your contract or SECCI agreement.
Always shop around before applying for car finance, to make sure youre getting the best deal possible. Here at Money Expert, we can help you compare car finance deals to make sure that youre getting the most for your money.
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Make One Large Extra Payment Every Year
If you can count on your grandma slipping a fat check into your Christmas card every year without fail, dont use that money to splurge on alcoholic eggnog . Instead, apply it directly to your car loan as a lump sum.
If you have autopay scheduled online, you can log into your account and simply arrange to make a one-time payment. If youre old-fashioned and pay by phone or mail, simply call your lender and let them know youd like to make an extra, one-time payment toward the principal.
Apply this logic to any unbudgeted funds, like a bonus at work or a tax refund.
Round Up Your Payments
Instead of making the required monthly payment, consider rounding up your payments, say to the nearest $50.
For example, let’s say you borrowed $13,500 at a 5% interest rate over a 72-month term. Your current monthly payment would be about $217. Rounding your payment up to $250 a month could save you over $330 in interest over the life of the loan and reduce your term length by 10 months.
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How Car Lease Contracts Work
Like any other contract, signing a car lease contract means that you’re agreeing to the terms set out within it. In the case of a car lease, you’re agreeing to lease the car for a certain period and to make a set number of payments. Unlike some other contract types, there is no cooling-off period for a car leasing contract.
As soon as you have signed the contract, the lease begins and you can’t easily back out of it or return the car. However, that doesn’t mean that there is no way out of it. There are several options that may allow you to return a lease car early or get out of your lease entirely, even if the contract isn’t up yet.
Selling A Car With A Loan On It
Another option involves selling your financed car to a private individual or by trading it in at a car dealership. Depending on your financial situation and needs, one option may be more suitable than the other.
How To Sell A Car With A Loan On It?
Sell It Privately When money is tight and you just want to get rid of your car loan, selling it may be the best option. By selling your car, you can use the money from the sale to pay off the car loan.
However, since the lender will have a lien on your car even after you sell it , buyers may be hesitant to purchase the car from you. To alleviate some of the apprehension they may be feeling, you can tell the buyer they can come with you to the bank, so they may witness you paying off the car loan.
Trade It In If money is tight, but you still need a car, you can opt to trade-in your car for a cheaper option. The money you get from your trade-in can be used to pay off your old car loan and as a down payment for your new car loan.
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Option : Paying In Full
The plainest way to get rid of your car loan is to pay it back in full. Banks or credit unions that finance car loans dont offer this option, but you can set up a payment plan with your lender to pay off the loan early. The catch is that youll have to cover all of your monthly payments plus an additional fee for paying it off early.
How To Save Money By Paying Off Your Car Loan Faster
EXPECTED READ TIME:9 minutes
Get-behind-the-wheel-quickly promotions have made it easier than ever to buy a car or truck. Theyve also created a financial dilemma for many American motorists.
Today, auto loans represent the third-largest source of debt among U.S. households, according to a report by the Federal Reserve Bank of New York, trailing only mortgages and student loans. Yet unlike mortgages and student loans, your asset your car actually depreciates instead of making you more money over time.
The good news is, paying off your vehicle loan early is one way to help reverse this trend. You can save money over the life of the loan, decrease your debt-to-income ratio, and free up monthly income.
That said, timing is everything. Well help you weigh the pros and cons to determine if and when you should pay off your car loan.
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