Does It Make Sense To Pay Off Car Early?

Pay Off Car Early

When it's time to file your taxes, and you're expecting a refund, the sooner, the better. In fact, you've probably already thought about the many things to do with this new-found money. Is it better to save it or spend it on bills? If you do decide to spend it on bills, which ones should you pay off? If you are thinking about paying off your car loan with your refund, here are some pros and cons to consider.


  • Pay less interest – The less you owe on your car, the lower the interest will be. Even if you don't pay off the entire balance, you will see a reduction in interest if you pay more than the monthly minimum. Your refund may give you the flexibility to pay an extra principal payment each month which will help lower your interest.
  • Improve your credit score – By paying off your car loan, your credit will improve. With good credit, you will lower your interest rates and improve your overall expenses. Take a look at these five ways to repair your credit score. Depending on your credit limit, you can get a car through our Auto Buying Service on your AAA Visa and earn triple points.
  • Increase monthly cash flow – Without a car payment, you will have extra money each month for savings or unexpected expenses. This financial cushion will give you a little more breathing room and reduce financial stress. You may even want to begin saving for your next new car from AAA Auto Buying
  • Lower your insurance. Once you've paid off your lender, you will not need comprehensive or collision coverage on your vehicle. You will still be required to pay the state minimums, but you are free to have just liability coverage. If you choose to change your policy, just be aware that you will not be covered for damage to your car in the case of an accident if you're at fault. 


  • Penalties for paying early – It's important to read the fine print in your contract when you buy a car. Dealers want your interest payments, so they design loans with penalties that make paying off loans early seem unappealing. If you are thinking of paying off the entire loan, be sure you are not going to be penalized. 
  • When you are paying interest on a loan that is precomputed – A precomputed interest loan is one in which the total interest for the life of the loan gets added on to the total amount you've borrowed upfront. So, if you pay off the loan early, you still have to pay interest for the full duration of the loan. 
  • Depending on your current financial situation, Financing might be a better budgetary option – If you have limited funds each month, you may need to spread out your tax refund over the course of a few months or divide it between other bills. Using the whole chunk on your car loan may cause you to tighten your purse strings in other areas. To help manage your finances, check out AAA's Personal Finance from Discover.
  • If you have a zero interest loan, there's no advantage to paying it off early –  Instead, use the money for one of your other bills with a high-interest rate. Putting your tax refund towards a cash purchase might be more advantageous. 

Remember that even if you pay off your vehicle, it will still need regular maintenance and repairs, so make sure to stash away a few extra dollars for this purpose. Your local AAA Car Care Center can help with all of your maintenance needs. Also,H & R Block and Turbo Tax offer AAA member discounts, so if you haven't done so already, make an appointment and get your refund early. If you choose to put your tax refund toward a new or previously owned vehicle, the experts at AAA Auto Buying are here to help. Call 1-866-710-6226 when you are ready.