The short answer is, yes, you can repay your car loan off early - only if you set yourself up with the right car loan to begin with.

Fixed-rate car loans may charge certain fees or penalties for paying out a car loan early as the lender will look to recoup some of the prospective revenue losses caused by your premature departure. In contrast, a variable-rate car loan could have fewer fees associated with paying out the loan amount earlier than the full term.

Paying off your car loan early can reduce the overall amount of interest you pay, saving you money in the long run. If you’re in a financial position where you can afford to go down this route, make sure you find out what exit fees may apply.

Read More: What’s the difference between variable and fixed-rate car loans?

How can I pay off my car loan faster?

There are a few options to consider when it comes to paying off your car loan early.

1. Make extra repayments

Some car loans may come with helpful features such as a redraw facility or the ability to make extra repayments without penalty.

Whether it be a lump sum payment such as your tax refund, a work bonus, or you sell a big-ticket item, consider putting this extra cash towards your car loan repayments. Not only does this help pay off your car loan sooner, it also helps protect yourself in the event you miss a repayment down the line.

Before you go ahead and make any extra repayments, confirm with your lender if there are any fees applicable as sometimes the cost of a penalty could outweigh any savings in interest you might have made.

2. Round-up your repayments

If possible, you could round-up your repayments to the nearest $5, $10, or even the nearest $50. Any extra amount you pay into your car loan will help reduce the debt faster, as long as your lender allows it without incurring additional fees.

3. Change your repayment frequency

If you can’t afford to pay more towards your car loan, you could try and pay more often i.e. increase the frequency. There are 12 months in a year, but there are 26 fortnights. If your loan is set up with monthly repayments and you divide these in two and make payments every fortnight, you'll make the equivalent of 13 monthly repayments every year - that's one month worth of extra repayments.

Because interest is calculated daily, increasing the frequency of your repayments can lower the amount of interest you owe over the life of the loan.

Pros and cons of paying off your car loan early


Save money on interest repayments

The faster you pay off your loan via making extra repayments, the less interest you will pay to the lender.

Peace of mind

There will be one less ongoing repayment you need to make. You’ll have more money coming in to save or even put towards paying off other debt.

Own your car outright

Many car loans are secured, meaning your vehicle is used as collateral in the case you were unable to repay the loan. Once you’ve paid the loan balance, 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 i.e. an encumbered car.

Lowers your debt-to-income ratio (DTI)

Your DTI is all your monthly debt payments divided by your gross monthly income. Lenders use this ratio to calculate your borrowing power and determine if your income is sufficient enough to service a loan. Eliminating your car loan can lower your DTI and help you secure other loans in the future - like a home loan.

Avoid owing more than your car is worth

This is known as being underwater or in negative equity on a car loan. If you have a long loan term and your car depreciates in value during that time, you may end up owing more than the car is worth. The quicker you pay off your car loan, the less likely this will happen.

This is due to the car loan’s amortisation schedule - more of your minimum repayment early in the piece goes towards paying interest rather than principal. Extra repayments chip away at the principal owed.


Early repayment fees

Some car loan lenders can charge exit and break fees for borrowers who pay down their debt before the loan term is up. These charges vary from lender to lender but in some cases, they can cost hundreds of dollars. If you want to make extra repayments but this will come at a cost, it may be beneficial to determine whether the fees outweigh any potential savings made.

Impact your budget

While clearing debt is important, it shouldn’t come at the expense of adding unnecessary stress to your finances. Weigh up whether you can actually afford to pay off your car loan early without throwing out your budget.

Other debts may be more costly

By prioritising paying off your car loan early, you may be overlooking other high-interest debt that may be better paying off first e.g. credit cards.

Opportunity cost

You should also look to the opportunity cost of the loan. Does having a loan on minimum repayments allow you to free up money to invest in other things that could yield a better return? If the interest rate on your car loan is less than the rate of inflation and your wage increases, you could ‘inflate the debt away’. Put it like this, $20,000 was worth more five years ago than it is today.

When does paying off a car loan early make sense?

Paying off your car loan early can be a big financial decision. Here are a few scenarios where it might make sense to do so:

  • You can afford it
  • You don’t have any other outstanding high-interest debt
  • You’re saving for a big purchase (e.g. property) and want to lower your DTI ratio and maximise your borrowing power
  • You have received a large windfall of cash to put towards the car loan
  • You want to avoid having negative equity on your car