Early Payoff of Car Loan

Many times people wonder if it would make more sense to have a savings account, or to use that money to pay something off – and many times they think they should pay off their car loan if they have one. They figure that the amount of money that they have sitting there getting interest, is gaining less interest than they are paying on the auto loan, so it only makes sense to pay it off.

However, experts warn that this may not be in your best interest. You have to be very familiar with your car loan first off all, for some have prepayment clauses on them. Some car loans will actually cost you more money, or a substantial penalty, for paying them off early. Lenders hope to gain a certain amount of interest off of an auto loan, and if you pay it off early they won’t get that money.

You also need to consider what sort of financial situation you will be in if you pay off the car loan. Do you have enough money to pay off the car loan and still have a nice amount of money left for emergency purposes? If not, then it is better to have the money in hand, then pay off a car loan and then have some emergency come up that you cannot pay for. And what about retirement funds? Do you have any money set aside for those? It may be in your best interest to put some money away for retirement instead of paying off the car loan.

If you have enough money to put some in an IRA, as well as have at least two months living expenses (although six is better), then you can go ahead and pay off the car loan. But it might be smarter to take half of the money you have left (depending of course on how much you have) and put that toward the car loan and the rest on a vacation, or some other well deserved treat.

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