Why I Paid Down My Auto Loan on a Used Car as Fast as Possible

Cars are a necessary expense for most Americans.

Unless you are lucky enough to live near a good public transportation system or in a major urban area, you will likely need a vehicle to accomplish tasks of daily living, such as getting to work, buying groceries, or going out to dinner. Buying a car can be expensive, and having a car loan can be a pretty steep financial burden, particularly on top of student loans, a mortgage or rent and other obligations.

That is why it makes sense to buy a used car whenever possible — and to pay off your car loan as soon as you can.

My Story

For me, buying a used car just made good financial sense. As a father of three young kids who is still working on paying off my student loans while saving for their college, I don’t have a lot of extra cash to put towards the latest and greatest vehicle. And while having a new car can be great, it’s no secret that a car is a terrible investment, as a new car starts to lose value the minute you drive it off the lot.

So when it was time for me to purchase a vehicle, I looked for a solid used car that was safe, reliable and a good deal. Then I got to work paying off my car loan as quickly as possible.

Why I Chose to Pay Off My Auto Loan Faster Than Required

Many people accept car payments as a fact of life. For me, not having a car payment represents financial freedom. Car loans can often have high interest rates, particularly if you arrange financing through the dealership. Loan rates may be as high as eight or ten percent.

Car loans may also be sold by a lender to a different bank, and if it has a variable interest rate, it may become more expensive over time as rates change. For these reasons, it makes a lot of sense to pay off your car loan as quickly as fast as you can — and avoid car payments entirely.

Saving Money

Of course, there are other benefits to paying off the debt on your car. When you pay off your car loans ahead of schedule, you will save significant money on interest. Interest on your loan — even if it is at a relatively low rate — can add thousands of dollars onto the total amount of your loan.

By adding even a small amount of money each month onto your car payment, such as $50 or $100, you can shorten your loan term considerable and pay hundreds or even thousands of dollars less on your car loan. A number of online calculators are available to help you determine how much you can save by paying off your loan early.

Freeing Up Money to Use Elsewhere

The money you save by paying off your car can then be used to start saving for your next car. Unfortunately, unlike a house or a college education, a car will not last for a lifetime. By buying a less expensive car and paying off your loan early, you can set aside money for a down payment on your next vehicle. That will help you get ahead of the game for your next car purchase — and perhaps even avoid the need for a loan at all.

Reduce Insurance Costs

Paying off your loan may also reduce your car insurance costs. When you have a car loan, the lender will require a certain level of coverage. Once you have paid off your loan, you can reevaluate your coverage. You may not want to dip below a certain level of coverage, but you might be able to save some money by lowering the amount of collision or comprehensive coverage for your policy.

Boost Your Credit Score

Finally, paying off your car loan will boost your credit score. Without a car loan on your credit report, your debt to income ratio will improve (in other words, you will have less debt in relation to your income). This will make it easier for you to be approved for major purchases and to get lower interest rates on mortgages or refinancing your student loans — which can save you even more money and help you reduce your overall debt.

Closing Thoughts

While it may be more fun to drive a flashy new car or to always have the latest car, it makes good financial sense to pay off an auto loan on a used car instead. By making that choice for myself, I am helping my family reach our financial goals — and achieving more security for our future.

Josh runs a parenting, faith, and personal finance blog over at Family Faith Finance. As the father of 3 children, he is always looking for ways to save a few extra bucks for his family.

4 thoughts on “Why I Paid Down My Auto Loan on a Used Car as Fast as Possible

  1. Miguel (The Rich Miser)

    When I had a car loan at ~1.5% through PenFed credit union, my logic for not making extra payments was that I could invest the money elsewhere and get higher returns. I’d think that, if you’re willing to take stock market risk, investing through a vehicle like Betterment might make sense.

    Reply
  2. A Journey to FI

    So what was the author’s IR? I think before there are two ways to look at this decision one that’s just based on numbers and the other one that is purely emotional. If you hate debt and would like to have peace of mind then pay it sooner. If your IR is low and you have an opportunity to get a return that overcomes the IR on the debt I would not pay it sooner. I know there is risk in investing but no pain no gain.

    Reply
    1. Josh

      Hey Journey to FI,

      Thanks for reading the article! Since it was a used car, the interest rate wasn’t the lowest it could have been (around 4-5 percent). For me, I grew up learning from my parents that you should pay for things out of pocket after watching them save money to make that sort of purchase upfront (just how they operated). That being said, from a principle standpoint, paying it off ASAP is more in line with the lessons I learned and offers me some peace of mind.

      That being said, I totally understand the argument where you simply pay the auto loan according to plan, while you take your money and invest elsewhere. If it works out, then you’re in the positive. I think it’s why a lot of people can make serious gains even with a mortgage over their heads.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *