Is paying off a car loan early a good idea? The pros and cons

By Polly Fleeting · · 3 min read
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man driving car purchased with car loan

Paying down your car loan early can be a great idea, but it also might not be. 

The truth is, in some cases clearing car loan debt can be a savvy option and can improve your financial situation. However, in others it can have the opposite effect and impact your ability to afford things or pay off other forms of debt. 

Essentially, it’s all about you and where you financially stand. 

So what’s the right choice for you? That’s where our pros and cons list comes in handy! Read on as we weigh up the advantages and disadvantages of paying off a car loan ahead of time… 

Paying off your car loan early: The Pros 

There are plenty of benefits to paying off your car loan ahead of time, here are some: 

  • Cleared debt: At the end of the day, clearing any sort of debt is a good thing as it means you don’t owe money to a bank or lender. By paying back what you owe, you can turn your attention to your savings or even borrowing for something else, such as taking out a home loan. 
  • Improves your credit score: Paying down your debt ahead of time can look good on your credit report as it lowers your debt-to-income ratio. By improving your credit you not only are helping the chances of you being approved for future lending, but you may also be able to receive lower interest rates through risk-based pricing. 
  • Vehicle no longer collateral: Because most car loans are secured personal loans, the car you purchased with the loan is likely being used as collateral. By paying off your car loan early, you don’t owe any more money to your lender therefore they no longer need to hold your asset (the car) against the loan as security. 

Paying off your car loan early: The Cons

The truth is, there are also some disadvantages to clearing your car loan debt early, these include: 

  • Early repayment fees: Some car loan lenders charge hefty exit and early repayment penalties for borrowers that pay down their debt before their loan term is up. In some cases, these types of charges can cost hundreds of dollars. 
  • Impact your budget: While clearing debt is an important part of financial healthiness, it’s also important to remember that paying off a loan shouldn’t come at the expense of throwing out your budget. Weigh up whether you can actually afford to pay off your loan early, it may be a matter of delaying how early you pay it off or even just sticking to your regular repayment plan and making extra contributions occasionally. 
  • Other debt may cost you more: By prioritising paying off your car loan early, you may actually risk yourself being charged interest on other high interest products you haven’t paid off, like a credit card. It’s important to look at all your financial products and prioritise which debt to clear first by determining which will cost you more. 

So, what are the take-home messages when finding the right car loan first up?  

1. Prioritise flexible repayments: Look for a loan with the option to make weekly, fortnightly or monthly repayments, as well as the choice to make extra repayments too. A redraw facility can also be handy in case you need to dip into your additional contributions later on. 

2. Avoid early repayment penalties: As mentioned, lenders can charge early repayment fees, so try and find an option that doesn’t come with this charge in case you clear your debt ahead of time. 

3. Secure a low interest rate: The lower the interest rate you get the better as this can reduce the cost of your loan over all (as you pay less in interest). By getting a low interest rate car loan, you can also pay down your debt quicker as more of your repayment goes towards the amount you borrowed rather than what you owe the lender in interest. 

4. Choose a short loan term if you can: If paying down your loan early may not seem like an option for you, by choosing a shorter loan term you’ll pay the loan off quicker than if you chose a longer term. This way your regular repayments would be higher but it would mean you pay less in interest as you are being charged interest over a shorter period of time.  

Ready to start comparing car loans? Check out these killer options below or jump over to our car loans comparison page for even more!

Compare Car Loans

Mozo may receive payment if you click products on our site. We don’t compare the entire market, but you can search our database of 91 car loans.
Last updated 30 October 2024 Important disclosures and comparison rate warning*
  • Used Car Loan

    Fixed, Secured, No vehicle age limit, $5,000-$75,000

    Interest rate
    comparison rate
    Monthly repayment
    6.57% p.a.to 18.99% p.a.
    7.19% p.a.to 21.78% p.a.based on $30,000
    over 5 years

    Get a competitive fixed interest rate on a secured used car loan of up to $75,000 depending on your credit score. No vehicle age limits. Easy online application. Fast pre-approval. Pre-approved funds held for up to 3 months. No monthly account keeping fees, no exit fees and no early repayment fees. Flexible weekly, fortnightly or monthly repayments on terms from 1 to 7 years.

    Repayment terms from 1 year to 7 years. Representative example: a 5 year $30,000 loan at 6.57% would cost $35,528.12 including fees.

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    Details
  • Used Car - Unsecured Personal Loan

    Interest rate
    comparison rate
    Monthly repayment
    6.99% p.a.to 24.99% p.a.
    6.99% p.a.to 22.79% p.a.based on $30,000
    over 5 years

    Competitive fixed rates for borrowers on 1-7 year loans from $5,000 up to $50,000. $0 monthly fees and no early repayment fees to pay. Fast application process on the Revolut app. According to Revolut and subject to loan approval, you'll receive your money into your Revolut account straight away. Eligibility criteria applies.

    Repayment terms from 1 year to 7 years. Representative example: a 5 year $30,000 loan at 6.99% would cost $36,132.67 including fees.

    Compare
    Go to site
    Details
  • New Car Loan

    Fixed, Secured, $5,000-$75,000

    Interest rate
    comparison rate
    Monthly repayment
    6.57% p.a.to 18.99% p.a.
    7.19% p.a.to 21.78% p.a.based on $30,000
    over 5 years

    Get a competitive fixed interest rate on a secured new car loan of up to $75,000 depending on your credit score. Easy online application. Fast pre-approval. Pre-approved funds held for up to 3 months. No monthly account keeping fees, no exit fees and no early repayment fees. Flexible weekly, fortnightly or monthly repayments on terms from 1 to 7 years.

    Repayment terms from 1 year to 7 years. Representative example: a 5 year $30,000 loan at 6.57% would cost $35,528.12 including fees.

    Compare
    Go to site
    Details
  • Any Age Car Loan

    Variable, Secured

    Interest rate
    comparison rate
    Monthly repayment
    10.69% p.a.
    10.97% p.a.based on $30,000
    over 5 years

    Repayment terms from 1 year to 7 years. Representative example: a 5 year $30,000 loan at 10.69% would cost $39,053.66 including fees.

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    Details
  • Car Loan

    Variable, Secured

    Interest rate
    comparison rate
    Monthly repayment
    9.99% p.a.
    10.21% p.a.based on $30,000
    over 5 years

    Repayment terms from 1 year to 6 years. Representative example: a 5 year $30,000 loan at 9.99% would cost $38,385.82 including fees.

    Compare
    Find out more
    Details

* WARNING: The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

^See information about the Mozo Experts Choice Personal Loan Awards

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