What Are the Typical Steps to Paying off the Remaining Balance of Your Car Loan Early?

There are ways to pay down your car loan faster, such as making extra payments or paying more than the payment due each month. If you are considering paying off the entire remaining balance before the repayment term ends, there are several common steps to take:

Step 1

Request a payoff letter from your financial institution which includes the good through date and the per diem amount, the daily amount of interest accrued on the car loan. While you may be able to obtain the information telephonically or via email, payoff information may also be available if you have access to your account through the financial institutions’ internet banking or mobile app.

If your car loan is from PNC, click here for contact information on how to request your payoff letter.

Step 2

Determine whether there is a prepayment fee or early payment penalty. Review your loan contract or contact your lender to confirm if such a fee is charged.

Step 3

Make arrangements for the final payment to take place on or before the date on the letter, or by using the per diem rate. Make sure the final payment will cover the payoff amount due at that time as the payoff amount may have changed since the letter was originally obtained.

Step 4

Once the loan is paid off, request a paid-in-full letter to confirm the loan account is closed.

What Are Some Pros of Paying Your Car Loan Off Early?

Choosing to pay off your car loan early can be a great decision for some, but is it the right choice for you?

Apart from no longer having that loan payment, there are several potential impacts to early repayment:

Impact to debt-to-income ratio: Your debt-to-income ratio (DTI) is often taken into consideration when you’re looking to obtain a loan. Lenders may use this ratio to determine whether you’re in a financial position to repay debt from an affordability perspective. Assuming your income remains the same, as you pay off debt, this ratio drops. Lower DTI ratios may increase your chances of approval or could help you qualify for a lower rate on future loans.

Reduction in outstanding debt: While debt can help you reach certain financial milestones, such as owning a house or a car, there are few things as liberating as making that final loan payment.

Increased cash flow: Fewer loan payments may mean more disposable income to put towards other expenses or to increase your savings and investments.

Avoid owing more than the car is worth: Depreciation is an important concept when buying a new car. It means that from the minute you drive the car off the showroom floor, your car drops in value. During the early months of the loan period, there’s a high possibility that the loan outstanding on the car is higher than the car’s actual value – lenders call this "negative equity" or being "upside down" on the loan. This can place you in a tight financial spot if the car gets totaled or stolen.

Own the car: Most auto loans are considered "secured," which means that the lender is the owner until the loan is fully repaid. That means if you fail to make your payments, the lender could repossess the vehicle, leaving you with no car but still having the obligation to pay the loan. Once the loan is paid off, though, you own the title free and clear.

What Are Some Cons of Paying Your Car Loan Off Early?

While it's good to get out of debt, the decision to pay off your car loan early shouldn't come at the cost of your financial stability. Take into consideration potential impacts such as:

Financial insecurity: Evaluate if you have a financial buffer in place, such as emergency savings, and the impact to your monthly budget. If all your savings is going into squaring off your car loan, or if unexpected expenses arise, you might not have a nest egg or room in your budget to fall back on if there's a sudden downturn in your financial situation.

Prepayment Penalties: Some lenders charge a penalty or fee for early repayment. The cost of the prepayment penalty or fee may exceed the interest you would pay during the remaining term of the loan.

Missed opportunities for the funds to be utilized elsewhere: While paying off your car loan might allow you to save on interest that would be charged during the remaining term of that loan, determine if you have other higher interest rate debt or a high interest savings account for which it may be more beneficial to apply the funds.

The Bottom Line of Paying off a Car Loan Early

Your personal financial situation will determine whether paying off a car loan early meets your financial needs. Assess your personal needs or speak with a financial professional to decide whether paying off a car loan early is the right decision for you.

Remember: Before committing to a decision, discuss your specific situation with a financial professional to help you weigh the pros and cons of paying off your car loan early.