Paying off a car loan in full over a relatively short period is an excellent way to reduce costs and overall personal finance risks. Auto loans differ significantly from other secured loans like mortgages in that the asset by which the loan is secured constantly depreciates. If the car is involved in an accident, the value of that asset can decline even more precipitously. Repaying the auto loan faster than necessary reduces the pressure on the owner to sell the car to "trade up" to another one.
Lower Costs
The most obvious advantage to paying off an auto loan early is the reduction in costs from interest payments. Car loans--particularly those for people with less-than-excellent credit--can charge relatively high interest rates, because the asset depreciates over time. Any increase in the principle repayment is an immediate boon for the personal finance bottom line.
Long-Term Ownership
When you hold outstanding car loan debt--like when you take advantage of a 0 percent APR period by avoiding making any payments--there's high pressure to sell the car and buy a new one on credit immediately to roll over the existing auto loan. This keeps the car owner in debt perpetually, usually increasing the debt load year after year. By ending the debt cycle, it makes it more feasible to drive the same car for years at a time. This can significantly reduce overall expenditures, as long as the car is maintained in good condition.
Improved Credit Rating
Paying back an auto loan in full has a powerful positive effect on the credit rating. This can lead to lower interest payments for other loans, access to special lending programs, better credit card deals, and a better overall state of financial health. Paying off an auto loan in full can also lead to a better future relationship with that particular auto lender. Lending officers tend to remember excellent customers. That company will most likely be more willing to extend credit to you in the future if you pay them off early.
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