What happens when you pay off your car? After you make your final payment, you can walk away knowing that you own your vehicle outright. This ownership gives you the freedom to clear up room in your budget so you can focus on other debt. But, with car ownership also comes some newfound responsibilities.
What Should I Expect When I Pay Off My Car Loan?
After you pay off your car loan balance, you can expect a few things to happen.
Debt-to-Income Ratio Will Improve
Your debt-to-income ratio refers to how much money you bring in regularly compared to how much money you owe in debts. For example, say you made $50,000 a year and owed a total of $25,000 in various debts. This would mean your debt-to-income ratio is 50%.
When you pay off a car loan, there will be a positive shift in your debt-to-income ratio. As long as your incoming cash flow has stayed the same, you should see quite an improvement in your credit after successfully getting rid of a car loan.
Credit Scores May Go Up
An impactful benefit of paying off your car loan is the credit score increase that should shortly follow. Check your credit report about a month or so after you make your last car payment. You should see that the debt associated with your credit file has gone down and that a loan has been removed from your profile.
When your credit score and credit reports improve, you may enjoy perks like:
- Access to a wider variety of financial products and services.
- Higher loan amounts.
- Lower interest rates.
- More convenient payback terms.
You can view your free credit score anytime you like from services like Credit Karma, your bank, or your credit card provider.
Credit Limits May Increase
One of the best benefits of paying off loans is the potential for Credit limit increases on financial products you may already have. For example, when your credit card issuer sees that you have significantly reduced the amount of debt you owe, they may reward you by raising your credit limit. That means you will have access to a larger amount in credit, allowing you to make larger or more frequent purchases.
However, be careful not to abuse your credit limit increase by overspending or making irresponsible purchases. It is still important to try to keep your credit utilization at around 30%.
What Should You Do After You Pay Off Your Car?
After you are finished paying off your car, consider the following.
Store Your Title in a Safe Place
Your vehicle title is the official documentation stating that you are the owner of your vehicle. If you ever want to sell your car, you will need your vehicle title. Since your title is such an important indicator of the ownership you have over your vehicle, it is vital not to lose this record. If an unwanted party should gain access to your vehicle title, they may be able to sell or use the equity in your vehicle without your consent.
To protect your asset, store your vehicle title in a safe and secure place. You may want to get a safe or safety deposit box at a bank to ensure its security.
Consider Using Your Car To Make Money
Vehicle owners have the opportunity to make extra money using their cars! For instance, you can start driving for delivery services like Grubhub, UberEats, or DoorDash. Or, you can even wrap your car for money and get paid to drive!
Decide What To Do With Future Car Loan Payment Funds
Now that you’ve paid off your vehicle, you may have a bit of free room in your budget. Use the money previously intended for your car payment for something useful. For example, you can start putting extra cash in a savings account or emergency fund. Or, you can use the funds to focus on other expenses and debts.
What Does It Mean To Own a Car?
Car owners have the opportunity to take advantage of benefits like saving money on car payments and using their vehicle however they like. But, they also take on other responsibilities such as repairing the car if needed and taking it in for routine maintenance.
No More Monthly Payments!
When you own your car, you don’t have to worry about making a monthly payment on it anymore! While you will still need insurance coverage and will have to pay for that monthly, you will no longer have a remaining balance on the vehicle itself.
Other benefits you may enjoy after paying your car loan is a decrease in your car insurance rates. Sometimes, insurance providers will lower rates for people who have paid off a vehicle or have reduced their debts in some significant way.
Free To Utilize Equity
As you pay back your car, the car loan provider acts as a lien holder of the vehicle. Lien holders have partial ownership over a piece of property and have the right to repossession if the borrower fails to pay back their balance or breaks their contract terms.
When you are free from a lien holder, you have the freedom to use your vehicle’s equity however you like. This includes the option to sell your vehicle or use its equity as collateral for a car title loan.
You Are Responsible for All Repairs and Maintenance
People paying off their vehicle sometimes have what is called warranty coverage. With a car warranty, certain types of maintenance are financially covered. Warranties usually expire while the car owner is paying off their vehicle or shortly after. Without warranty coverage, you will be financially responsible for all repairs and maintenance your vehicle needs, which include:
- Tires.
- Electrical.
- Bodywork.
- Paint or other cosmetics.
- Oil changes.
When You Should Consider Paying an Auto Loan off Early
Paying off car loans early can have a major impact on your overall financial health and wellbeing. If you are thinking about paying your car loan early, make sure the following apply to you.
Payments Fit In With Your Budget
Check your monthly budget to see if you can afford to pay a bit more on your car loan payments. By paying extra each month, you can cut down the time it takes to pay off your car by months or even years!
There Are No Prepayment Penalties Built Into Your Loan Contract
Before you start making extra payments or early payments, check your loan agreement to confirm there are no prepayment penalties. A prepayment penalty is a charge some lenders issue for borrowers who make their loan payments before the designated due date. Many expensive loan options, such as an online payday loan, have prepayment penalties.
You Don’t Have Any Other Pressing Financial Concerns
Before you start putting extra money towards your car payments, look at how much debt you owe in total. If you have any past-due bills, focus on those first. Or, if you have a long list of bills to take care of, consider spreading out your available income to cover more debts.
But, if you don’t have many other financial obligations, it may be in your best interest to put some extra income towards your car payments.
How To Save Money on Your Car Payment
Everyone wants to save money! Check out some tips below for saving money on your car payments.
Negotiate Your Contract
Before signing your loan agreement, read it over thoroughly. Then, make your lender clarify anything that doesn’t make sense to you. This is also an excellent time to negotiate your loan details if you like. For example, say you were reading your loan agreement and saw your lender planned on charging you an extremely high-interest rate. It may be worth it to ask for a reduced rate and see what your lender can do for you. By getting a lower rate, you can save hundreds of dollars or more over the course of your loan.
Consider Refinancing
If you already have a car loan but are struggling to keep up with the payments, it may be wise to refinance. Refinancing with an installment loan or personal loans may be a great way to get a lower rate or a better loan term.
Tips for Paying off a Car Loan Early
Don’t wait to reap the benefits that can come from paying off your car loan! Check out the helpful tips below so you can learn how to pay off your car loan early.
Pay More Than Your Minimum Amount Due
Pay off your loan faster by paying more than the minimum amount each month. This may also be a helpful solution if you want to pay off your loan faster but are dealing with a loan contract that includes prepayment penalties. You can also save a significant amount on interest payments by paying more each month.
Make Extra Payments if You Can
If you have some extra cash lying around, consider putting it towards your car loan. Even if you don’t have enough money for a full payment, you can make partial payments to chip away at your balance even faster.
Get Some Additional Income
If you have the time and the energy, consider getting a temporary part-time job to help out with your car payments. You can also get some additional income by having a garage sale and selling some unwanted items.
Is It Worth It To Pay Off Your Car Loan Early?
The bottom line is if you have the available funds, it is probably in your best interest to pay off your car loan early. That way, you can free up extra income in your budget so you can start focusing on other financial goals!
References:
Should You Pay Off Your Car Loan Early? – Forbes Advisor
Here’s What You Should Do When You Pay Off Your Car Loan