Why Paying a Car Loan Off May Be Beneficial

Posted by Gale Freeman on September 29th, 2022

When a person has extra cash, they may spend it on things they want and need. However, some people choose to use this money to pay their car debt off early. This helps to lower their monthly payments, so they have more cash each month.

Before deciding whether to pay the loan off before it comes due, Consumer Portfolio Services says a borrower should consider the monthly payment, the interest rate, and the financial consequences of using the money for this purpose. What benefits come with paying off a car loan early?

Lower Debt-to-Income Ratio

When calculating a person's debt-to-income ratio, a lender looks at their income and debt owed. A lower debt-to-income ratio is preferred, as the lender knows the borrower can still make the payments even if their financial circumstances change somewhat.

When a person pays their car loan off early, they lower the debt-to-income ratio. Lenders will see them more favorably if they need to secure credit in the future.

Save Money

When a person pays their car loan off early, they pay less in interest. In addition, paying extra on the principal each month helps to reduce the total interest paid on the loan.

This means the person will have additional cash each month. This money may be used to pay down other bills, for regular expenses, or for any purpose the person desires. Some people choose to put this money in a savings account so they will have a bigger down payment when the time comes to replace the car they just paid off.

In addition, when a person pays their car off early, they often find they pay less in car insurance. They no longer have to carry full coverage on the car if they don't want to. There are drawbacks to consider before dropping full coverage, however, that must be considered.

An Asset

Once a person pays a car off, it is theirs free and clear. They now have an asset they can sell or trade as desired. In addition, the risk of having the car repossessed is eliminated once the loan is paid in full.

This gives many drivers peace of mind. They know they won't lose their car if their financial circumstances change for any reason.

However, before paying off a car loan early, speak to Consumer Portfolio Services to learn if there is a prepayment penalty. Some lenders assess this penalty, which can increase the payoff quote. It's always best to have this information when deciding whether paying off the car loan early is a wise move.