Looking to make a car loan payoff will release you of your obligation to your current lender. Many borrowers want to pursue this option in order to get out of the debt. Others have immediate liquidity to pay off the loan and would like to do so in order to own the asset outright. In any case, opting to pay off your loan has many potential rewards. Surprisingly, however, there may also be downsides to paying off the debt.

#1 Pay More than your Monthly Payment

Paying consistently more than you owe each month will put you en route to paying off your loan early. While car dealers may tell you not to do this, they are simply looking to make your loan longer in order to collect more in interest fees. It is best to aim for the highest monthly payment you can reasonably afford. In months where you can make a larger payment to take a few hundred dollars off your principal, you should go ahead and do so. You will find you may be on track to pay off your loan several months to a year early simply by increasing your payment size.

Additionally, it is critical to send additional money in a separate check and label the check with appropriate instructions to alert the lender that the payment is for principal.  Many lenders collect the money and apply it to the next payment instead of eliminating the balance. The best thing to do is write a letter and on the check write “Apply to principal balance ONLY.”

#2 Consider Settling

If you have recently received a large amount of cash and would like to pay off your loan, consider offering a debt settlement to your current lender. With a debt settlement, you actually pay less than the remaining amount you owe on the loan. However, since the lender is guaranteed to get all of the money up front, the lender may see this as a favorable option. In order to be considered for a debt settlement, though, you should have made enough payments to cover the original expense of the loan, plus inflation, for the lender. 

#3 Look Out for Prepayment Fees

Prepaying a car loan will typically result in prepayment fees. This is particularly true if you took the loan direct from a dealer. Dealers tend to have higher penalties than banks. When you signed your loan contract, you agreed to these terms. If they are not in your originally contract, you are not obligated to pay them. Check your contract to see. Even if they are in your contract, you may ask to have them excused or reduced in exchange for a lump sum early pay off. Most lenders will not accept this offer, however. 

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