How to Pay Off a Car Loan Early

Five ways to pay off a car loan early

1. Add extra principal each month

Round your $387/month payment up to $450, with the extra $63 marked 'principal-only.' On a 5-year, $20K loan at 6%, this cuts your payoff by ~10 months and saves about $500.

2. Switch to biweekly payments

Pay half your monthly amount every 2 weeks. You end up making 13 monthly payments per year instead of 12. Cuts a 60-month loan to about 54 months.

3. Make one extra full payment per year

Use a tax refund or bonus to make one extra payment annually. Saves about 6–9 months on a 5-year loan.

4. Refinance to a shorter term

If rates have dropped or your credit improved, refinance from 60 months to 36–48 months. Higher monthly payment but huge interest savings.

5. Pay it off in a lump sum

If you have cash sitting in low-yield savings (and an emergency fund intact), paying off the loan is a guaranteed return equal to your loan rate.

Real example: $20,000 loan at 6% over 60 months

• Standard payment ($387/month): paid off in 60 months, $3,200 interest
• +$50/month extra: paid off in 53 months, $2,820 interest, save $380
• +$100/month extra: paid off in 48 months, $2,510 interest, save $690
• Biweekly: paid off in 54 months, $2,860 interest, save $340

Watch out for prepayment penalties

Most modern auto loans (US) have no prepayment penalty, but some subprime and older loans do. Read your contract or call your lender before making large extra payments.

When NOT to pay off early

• You don't yet have a full emergency fund (3–6 months expenses)
• You have higher-rate debt (credit cards at 20%+ should always come first)
• Your loan rate is below 4% and you can earn more in a high-yield savings account
• You'd be using money that should go to a 401(k) employer match

How to send extra payments correctly

1. Log into your lender's portal or call them
2. Specify that extra payments should be applied to PRINCIPAL, not next month's payment
3. Confirm in writing if possible
4. Verify on your next statement that the principal balance dropped by the full amount

Some lenders default to applying extra to future interest — call them and confirm they apply to principal.

Trade-in trap to avoid

If you owe more than your car is worth ('underwater') and trade it in, the negative equity often gets rolled into your next loan. Better to pay down first, then trade in when you have positive equity.

Use the calculator

Frequently Asked Questions