Paying your car loan off early could help you free up more of your income for other things and save you hundreds, if not thousands, of dollars in interest. Before you pay off your car loan, though, you should make sure that you look at your whole financial situation and what could happen if you pay off the loan before it matures.
Here are six things to ask yourself before you pay off your car loan early.
1. Do You Have Other High-Interest Debt?
The first thing to ask yourself is if it’s worth paying off your car compared to other high-interest debts. If your car loan has an interest rate of 4% but your credit card has an interest rate of 18%, it makes more sense to pay off the credit card first and to eliminate that interest as soon as you can. In the long-term, doing so will save you more money.
2. Is the Car’s Interest Rate Higher Than Your Investments’ Rates?
If the vehicle’s interest rate is higher than the interest your investments are earning, it may be time to pay off your auto loan. If the reverse is true, you can invest and make more money with the money you’d be spending on your vehicle. In that case, investing is the wiser choice.
3. Are You Trying to Get a Mortgage?
If you are trying to get a mortgage, you may want to reduce your debt-to-income ratio. If you don’t have a lot of other debts, having an auto loan may not be a big deal when qualifying for a loan. It’s worth talking to a mortgage lender about your situation first, so you can decide if paying off your car or having more money for your down payment is a better idea.
4. Do You Have Emergency Savings Prepared?
Before you spend all your money paying off your vehicle, ask yourself if you have enough left over for emergencies. You should try to have at least three to six months’ worth of expenses saved up.
5. Do You Want to Be Debt-Free?
If your only goal is to be debt free and you have the money to do it without risking going into debt from emergencies, paying off your car loan could be a good choice. It will free up your income for other things you want to do.
6. Will You Face Penalties?
Finally, find out if paying off your car loan will result in penalties. Prepayment penalties could negatively impact you, leading to additional interest and fines for breaking the contract.
These are some things to consider before you pay off your vehicle. Paying off a loan can be a great step toward financial freedom, but other options could be a better choice.
