It often makes sense if your loan uses simple interest, has no prepayment penalty, and you already have emergency savings and no higher-interest debt such as credit cards. ProfitDrawer's car loan guide shows that on a $25,000 loan at 7% APR for 60 months, an extra $100 a month saves $939 in interest and ends the loan 11 months early. If a card charges a much higher rate, paying the card first usually saves more.
Check these first:
- Prepayment penalty. The CFPB notes some lenders charge one, and some states ban them for certain loans. Read your contract or ask your lender.
- Interest type. On a simple interest loan, extra principal cuts future interest. On a precomputed interest loan, the CFPB says extra payments do not reduce the interest owed, though you may get a refund of some unearned interest if you pay off early.
- Where extra money goes. Ask how to mark payments as principal only, then confirm on your statement that the principal dropped.
Paying extra is a good fit when most of these are true:
- You have some emergency savings.
- You have no higher-interest debt.
- There is no prepayment penalty and the loan uses simple interest.
- You are on track with the retirement savings you want.
It may wait if your car loan rate is low and you carry a credit card balance, or if one surprise bill would push you onto a card.
Run your own loan in the free loan payoff calculator. General information, not financial advice.
Source: How to Pay Off a Car Loan Faster (ProfitDrawer guide) · Updated
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General information, not tax, legal or financial advice. Check the rules for your state and your situation.