How early payoff works on a car loan
Most auto loans use simple interest: interest accrues daily on the unpaid principal. Extra money applied to principal lowers that balance immediately, so later interest charges shrink.
Example
On a $30,000 five-year loan at 7.5% APR, the regular payment is $601.14 and total interest is about $6,070. Paying an extra $100 per month finishes the loan in about 4 years 2 months, around 10 months early, and saves about $1,050 in interest.
Check before paying extra
- Confirm the loan is simple interest and has no prepayment penalty. Some precomputed loans (for example, certain subprime contracts) calculate interest differently, so extra payments save less.
- Specify that extra money goes to principal, not to the next due date.
- If the loan has a high rate, extra payments usually beat low-yield savings; if the rate is very low, other goals may come first.