When it comes to debt there are many types. If you “own” a car, you may be all too familiar with the reality of an auto loan and the bite it takes out of your monthly budget. Often needing a car and the corresponding debt that comes with it is a necessary evil, but it doesn’t have to rule your financial life. Here are some tips on when you should pay your auto loan off early and what you need to know if you do.
When you should pay off your loan early
While the idea of owning your car without having to pay another pesky auto payment is a very attractive goal, it doesn’t always make sense as a financial priority. If you’re debt-phobic you probably can’t wait to get rid of the added expense, but if you have a low interest rate, your auto loan is probably not your biggest concern. Before tackling this debt, you should prioritize paying for medical insurance, paying off any credit card loans, student loans, building an emergency fund, and saving at least 15% of your income to put towards retirement.
As you probably noticed, that’s a pretty hefty list of items that need to get prioritized over paying your auto loans, so don’t kick yourself if you pay off your loan at the same rate prescribed by your bank or lending institution. However, if you do find yourself in a position to pay off your auto loan, there are a few things you should know.
How to pay your loan off
If you’ve decided you’re capable and motivated to pay off your auto loan early, the first thing you want to do is look at your loan agreement. A lot of lenders will store a copy of your loan document on your online portal with them. Take a look through the paperwork specifically looking for any language that might penalize you for paying off your loan early. If you aren’t sure about some of the language, reach out to a representative to confirm that there are no penalties for early payment.
Once you have confirmed that there will be no penalties assessed, you can either bump up your monthly payments to what you can afford instead of just the minimum required payment or you can go ahead and pay off your loan in full if you are able to. Either will save you money in interest payments, and you should feel proud either way. Make sure you are paying down what you can afford to pay and no more. While extinguishing this debt is exciting, making a prepayment that you are not 100% sure you can afford can actually end up costing you. For instance, if you don’t have enough money saved and an emergency comes up, you may end up putting those expenses on a credit card which most likely will accumulate interest at a much higher rate than the auto loan would have.
What you need to know when you pay off your loan
After all that, you’re finally ready to pay off your auto loan. There are two things you need to know. First, your final payoff cost may be slightly higher than the principal amount that your loan documents show that you owe at that time. This is because interest is probably accruing daily on your loan and therefore unless you pay off your loan at the payment date set by the bank, interest will start to accrue again. A lot of banks and lending institution are nice enough to calculate a payoff quote automatically on their online portal so that you can see exactly how much you will need to pay to officially pay off the loan. If not, call your bank and ask them what the payoff amount will be on the day you plan to payoff the loan. If you don’t pay the proper amount, you may end up owing interest the next month even though you thought you had squashed the loan for good.
Now that you have officially paid off your auto loan, you need to do a little bit of paperwork. The title for your car was probably put in your lending institution’s name at the time you bought the car, so in order for you to officially own the car, you will need to have the title changed over into your name. To accomplish this, you need to request a lien release from your lender. A lien release is essentially a document from the lender stating that you have paid off your loan and they are releasing their claim to the vehicle. Depending on your state, the lender will either send the lien release to you or directly to the Department of Motor Vehicles (DMV). Either way the DMV will need this document to re-title your car in your name and to make you the official owner of your car.
If you’ve made it this far, congratulations! You’re the proud owner of your automobile. Now you can put the money you would have spent on your monthly payments towards your next financial goal!
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband, and enjoys taking their adorable mutt for walks or reading a good book while buried under a pile of cats.