How early can you pay off your car loan? Why is the payoff amount higher than my balance? AutoGravity answers the questions you may have on a car loan payoff calculator.

Getting a car loan can be complex business, but figuring out when you can pay it off can be even trickier. Using a car loan payoff calculator can help you see how early you can pay off your loan and figure out how much you can save by doing so.

Even though the payoff amount will likely be higher than your balance, it can be beneficial to pay off your loan early. We’ll walk you through how to do it right, how to get ahold of your title and why it’s important, and what to do once you pay off that car loan. Here are some common questions:

How early can you pay off your auto loan?

Imagine of calendar showing early loan payoff schedule for car loan payoff calculator

Depending on the terms of your contract, you can pay off your auto loan as soon as you take it on. When you take on a car loan, you not only take on the cost of the car, but the cost of the interest. Some lenders put language into the loan that prevents you from paying off an auto loan early, while others allow you to pay a little more each month to reduce more of the principal of the payment. Despite that, using a car loan payoff calculator can help you understand the financial implications.

Lenders are in the business of making money. To that end, there are a few terms that you should know before you start investigating whether it makes sense to pay off your auto loan early.

  • Principal: The principle of the loan is the amount of money you are borrowing
  • Interest: The interest on a loan is the amount that you pay to the bank for loaning you the money. The interest on a loan generally includes things like your annual percentage rate and any lender fees that the bank charges on the money they’ve loaned you. The interest rate is based on your credit score
  • Duration or Term: The duration or term of the loan is the period of time you have to pay back the money you’ve borrowed

When you sign a car loan, you agree to the terms of that loan. That includes the way your payments are applied and how long you’ll need to pay off the loan — so changing those rules can be a bit tricky.

If you’re looking to pay off your auto loan early, check these things in your contract first:

  1. See if there’s any language prohibiting you from paying the loan off early
  2. See if you can make principal only payments to the loan. These are payments that will only be applied to the principal of the loan
  3. If you can make principal only payments, be sure to follow the instructions from your bank or lender on how to make those payments
  4. See if there are any fees associated with paying principal only payments. Some banks charge for this and it can be quite a considerable cost

Some banks require you to send a separate paper check to a different address in order to apply payments to the principal of your loan. Some will simply apply additional payments to future payments and not pay down the principal of the loan. Do your research before blindly sending in your money so that you can be sure that it’s being applied to the principal of the loan and paying it down earlier.

What are the options to pay off my car loan, early?

There are a variety of options to pay off your car loan early, which can include:

  • Making multiple payments per month
  • Making one large extra payment per year
  • Making one large payment over the course of the loan

Each person’s debt-payment strategy should be tailored to their situation. There’s no one-size-fits-all solution. To learn more about your options, refer to the section above entitled How early can I pay off my auto loan?Or, you can use a car loan payoff calculator.

When is it worth paying off your car loan early?

Imagine person stepping on gum

It’s worth paying off your car loan off early if you are carrying a loan that meets the following criteria:

  • If you are carrying a loan with a very high interest rate
  • If you can’t refinance that loan to a lower rate

Outside of those two instances, it might be better not to pay off your loan early. Cases where it may not make sense to pay off your auto loan early include:

  • If you have a car loan with a low interest rate
  • If you are tight on cash flow and need to remain liquid
  • If you have minimal savings

What’s the cost of paying off my car loan early?

It can cost you a lot to pay off your car loan early, and that cost can range considerably depending upon the terms of your loan. Sometimes an online car loan payoff calculator may not be 100% accurate, so doing the math by hand is a good option.

To figure out how much it will cost to pay off your car loan early, you’ll need to do a few things.

  1. Read the contract and find out if there are any penalties for early payment
  2. Do the math on the costs of paying off your car loan early

Search for an online car loan payoff calculator and fill in your info (example here). Or, you can do the math by hand by following the following formula.

  1. Look at the total principal amount on your loan
  2. Factor in your interest payments over time
  3. Figure out your Annual Percentage Yield (APY) by following this formula:

APY = (1 – rate per period) (number of periods per year – 1)

  1. Add that APY to your total principal amount for the total cost of your car loan
  2. Subtract the sum of payments you’ve made up to this point. (This doesn’t include prepayment fees, which are listed in your contract)

Prepayment = Principal + APY + Prepayment fees

According to the car loan payoff calculator, why is my car loan payoff higher than my balance ?

Oftentimes, when you do the math on paying off your car loan early, the balance that remains will be higher than the loan that you took out. This is because banks make money on lending to you and they charge you a fee for using their money. These terms are in your contract, and you are legally bound to pay the higher amount to satisfy the loan agreement unless you decide to refinance.

Many lenders also charge prepayment fees that are associated with paying off your auto loan early. Those fees will show up in your bill if you decide to pay off your car loan before its due date.

In general, banks and credit unions use compound interest. Compound Interest  is interest that’s charged on both the principal amount of the loan and the accrued interest on that loan. If you were to check your balance on a day-to-day basis, you’d see the amount increase incrementally over time.

Auto Lenders tend to use simple interest. Simple interest is a rate that’s only charged to the principal amount of the loan. Simple interest loans can save you considerable money over the life of the loan.

Still other lenders use what is known as precomputed interest. Precomputed interest is the total interest that you’ll pay over the life of that loan, and it’s generally based on simple interest. That number is often baked into the agreement that you sign when you take out a car loan; without refinancing you usually can’t get out of paying it.

What are the right steps to paying off my car loan early?

To pay off your car loan early, follow these steps:

  • Read your contract
    • See if there are any prepayment penalties
  • Find out how your prepayments are applied to your balance
    • Some banks apply them to future payments; some, only to the principal of the loan if explicitly instructed to do so
  • Decide on a prepayment plan that works for you
    • A plan that balances your access to cash, savings, and paying down debt is ideal
  • Make your prepayments as the bank directs you and check that they’re being applied correctly
  • Continue to make the payments until your car loan is paid off. Using a car loan payoff calculator doesn’t guarantee an outcome until you’ve made financial arrangements.

What do you do once you pay off an auto loan?

Image of road ahead representing next steps after loan paid off

Once you’ve paid off your auto loan, follow these steps to get all the paperwork in order.

  1. Keep a receipt of your final payment
    • Most banks send out paper statements or email statements that show that you have paid off your loan
  2. Verify the paperwork
    • In most states, the lienholder (bank or group that loaned the money) will notify your DMV that it’s time to change the title on your car. The title is the document that shows the ownership history of the car, and that it’s registered with the state
  3. Once the lienholder sends in the information, your DMV will send you a title with your information on it
    • Verify that everything is correct. If it’s not, you’ll need to head to the DMV to sort things out
    • Be sure to bring a receipt proving that you’ve paid off your car and any required identification
  4. Adjust your insurance to reflect the new title
    • You’ll need to let your car insurance company know that there’s no longer a lienholder on the title. They’ll make the change on the insurance, and your rates will not change as a result of this
  5. Check your insurance coverage
    • Most banks and lienholders require that you have comprehensive and collision insurance (both of which are good to have and keep) but you may be able to reduce the cost by taking a closer look at your options. Just make sure you meet your state’s minimum requirements for insurance
  6. Start stashing that extra cash
    • Now that you own the car, you should use that extra money to save or pay down other debts. You should also stash some cash for unexpected maintenance repairs on your car
    • Keep the title in a safe place (not in your car). It serves as proof that you own the vehicle

How do you get your car’s title and why is getting your title important?

To get your car’s title, you don’t need to do much. The bank or lienholder will notify your local DMV or state that you’ve paid off the car; once your final check clears, you’ll receive your title in the mail. In some states, you’ll need to go to the DMV to get the title. Check with your state’s Department of Motor Vehicles to learn what you need to do.

Don’t worry if it takes a bit of time for the title to show up or be available. Lienholders generally wait until that final check clears before they notify the state of the title change.

If you want to learn more about how to use an car loan payoff calculator to figure out how early you can pay off your loan, follow these steps; you’ll be sure to find the right financial footing for you.

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How to Use a Car Loan Payoff Calculator to Pay Off Early
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How to Use a Car Loan Payoff Calculator to Pay Off Early
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The early payoff amount may be higher than your balance, but worth it. Use this car loan payoff calculator guide to know how to do it right.
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AutoGravity
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Abigail Bassett is an Emmy-winning journalist, video content producer, and manager who has covered a wide range of world-impacting events including everything from the invasion of Iraq to Katrina and the financial and housing collapse. She has covered premiere automotive and lifestyle launches and unveilings all over the world over the last 15 years. Abigail has also extensively covered personal finance for a variety of outlets and start-ups including CNN Business, Money Magazine, and LendingTree. She spent more than ten years as a Senior Producer at CNN in New York and was most recently the Senior Director of Photo, Video and Social Media at Edmunds. She currently lives and works as a freelance writer and content manager in Los Angeles. Her clips have appeared in top-tier publications including Autoweek Magazine, Forbes, Arstechnica, Motor Trend, TheDrive, Fast Company and Fortune. She is also a U.S. juror for the World Car Awards.

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