Knowing how to pay off your auto loan early can get you out of auto debt faster and save you money on interest. But unlike student loans, some auto lenders charge a penalty for prepaying your loan. Others will charge you a certain amount of “precomputed interest,” regardless of whether you pay your loan off early or not.
Fortunately for Tyler Lenz, neither prepayment penalties nor precomputed interest were a problem. He was able to pay off his auto loan early and save hundreds in interest. To see how Lenz accelerated his debt repayment — and to consider whether paying off a car loan early is right for you, too — let’s touch on the following topics:
- How to pay off an auto loan early
- How to accelerate debt repayment
- How to determine your potential savings
- How to decide if you should pay off your car loan early
Relying on a car loan to buy a vehicle can be an expensive gamble. The average amount customers borrow for a new car is $32,480, according to LendingTree, and the average monthly car payment is $550 over 69 months with 8.06% APR. If you have other forms of debt, such as student loans or credit cards, that’s a large chunk of your income to spend on another loan.
If you borrowed the average amount of $32,480 and had a 69-month repayment term at 8.06% interest, you’d pay $8,213 in interest. That’s an extra $8,213 you could have used to pay for other goals, such as paying down debt, building an emergency fund or even planning a vacation.
The thought of wasting extra money on interest was a wake-up call for Lenz. Even though he had a low interest rate of 2.19%, Lenz is a Dave Ramsey fan. And according to Ramsey, debt — any debt at all — is an emergency that requires immediate action.
With that mindset, Lenz felt like the loan was a drag on family resources.
“For two years, we didn’t do anything to accelerate payments,” he said. “We just paid our regular payments every month. Something just clicked about six months ago. When I looked at the numbers, I saw that if we used our extra money — like what we put towards savings — we could hammer out the loan in a short time.”
Avoiding interest charges and having one less financial obligation was a major motivator for Lenz and his family.
“We had experienced the euphoria of not having loan payments, and we wanted to get back there,” said Lenz. “That was the driver for paying [the car loan] off.”
After thinking about how to pay off their auto loan early, Lenz and his family set up an aggressive repayment strategy. Because the car loan was a priority to them, they juggled some of their other financial contributions. They did the math and decided it was worth it to cut back on contributing to their retirement and kids’ education funds.
By pausing their retirement and college savings contributions, they were able to put hundreds extra toward their car loan.
They also looked around their home for things they could sell for extra money to use for payments. They sold toys, clothes and household items on sites like Craigslist to make more money.
Lenz advised “look[ing] around and figur[ing] out what you have that you don’t use.”
“People have hundreds or thousands [of dollars worth of stuff] they don’t use, and that can give you a good start,” he said. “It can give you enough momentum to build the habit of thinking about paying off debt.”
Lenz and his family focused on paying off the car loan as soon as possible and paid it off in three years. That was well ahead of their scheduled repayment date, helping them save more money.
Even at such a low interest rate, Lenz’s family saved money by paying off their car loan early. For example, if you had the average car loan of $32,480 for the average 69-month term at 2.19%, you’d pay back $34,598 in total — that’s about $2,118 in interest.
If, like Lenz, you decided to accelerate your repayment and pay off your debt in 36 months instead of 69, however, you’d pay back just $33,588. By making extra payments, you could potentially save over $1,000 in interest. You can use this calculator to run the numbers on your own loan:
Lump Sum Extra Payment Calculator
However, that’s assuming that your lender doesn’t charge a penalty for prepaying your loan. Plus, as mentioned, some lenders also demand a set amount of precomputed interest, regardless of how fast you pay off your loan.
So before you make extra payments, contact your lender or refer to your loan contract to find out if you’ll have to pay these extra charges. If you do, you might not get the amount of interest savings you’re hoping for.
Many people wouldn’t worry about accelerating payments on a low-interest loan. Lenz acknowledges that, at 2.19% interest, his family might have made more money by investing rather than paying off debt.
However, finances aren’t always about what makes sense on a calculator, but what works best for a family’s peace of mind. For Lenz, being debt-free was a huge weight off his shoulders.
“Not having monthly obligations is huge,” Lenz said. “It allows me to focus on what’s important … like family vacations and trips.”
But whether or not you decide paying a car loan off early is worth it, looking at new purchases and loans critically can help you limit debt and afford your future goals.
Are you motivated by Lenz’s story? Before diving in, learn the pros and cons of paying off your car loan early to see if it’s right for you.
Rebecca Safier contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2022!
|Lender||Variable APR||Eligible Degrees|
|2.49% – 11.72%1||Undergrad & Graduate|
|2.50% – 6.30%2||Undergrad & Graduate|
|4.13% – 7.39%3||Undergrad & Graduate|
|2.49% – 7.99%4||Undergrad & Graduate|
|2.49% – 7.99%5||Undergrad & Graduate|
|3.24% – 8.24%6||Undergrad & Graduate|
|2.48% – 7.98%||Undergrad |
|1.74% – 7.99%7||Undergrad & Graduate|
|3.69% – 9.92%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 6, 2022.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $9 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
3 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 09/09/2022 student loan refinancing rates range from 4.13% APR – 7.39% Variable APR with AutoPay and 2.99% APR – 9.93% Fixed APR with AutoPay.
4 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
You can choose between fixed and variable rates. Fixed interest rates are 3.99% – 8.74% APR (3.74% – 8.49% APR with Auto Pay discount). Starting variable interest rates are 2.74% APR to 8.24% APR (2.49% – 7.99% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.
5 Important Disclosures for Navient.
6 Important Disclosures for SoFi.
Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 3.24% APR to 8.24% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
7 Important Disclosures for Purefy.
Purefy Student Loan Refinancing Rate and Terms Disclosure: Annual Percentage Rates (APR) ranges and examples are based on information provided to Purefy by lenders participating in Purefy’s rate comparison platform. For student loan refinancing, the participating lenders offer fixed rates ranging from 2.73% – 7.99% APR, and variable rates ranging from 1.74% – 7.99% APR. The maximum variable rate is 25.00%. Your interest rate will be based on the lender’s requirements. In most cases, lenders determine the interest rates based on your credit score, degree type and other credit and financial criteria. Only borrowers with excellent credit and meeting other lender criteria will qualify for the lowest rate available. Rates and terms are subject to change at any time without notice. Terms and conditions apply.
8 Important Disclosures for Citizens.
Education Refinance Loan Rate Disclosure: Variable interest rates range from 3.69%-9.92% (3.69%-9.92% APR). Fixed interest rates range from 4.49%-10.11% (4.49%-10.11% APR).
Undergraduate Rate Disclosure: Variable interest rates range from 6.39%- 9.60% (6.39% – 9.60% APR). Fixed interest rates range from 6.58% – 9.79% (6.58% – 9.79% APR).
Graduate Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).
Education Refinance Loan for Parents Rate Disclosure: Variable interest rates range from 3.69%- 9.09% (3.69%- 9.09% APR). Fixed interest rates range from 4.49% – 9.28% (4.49% – 9.28% APR).
Medical Residency Refinance Loan Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).