You’ve been thinking: “Should I pay off my car finance early?” or “Is there a downside to paying off my car finance early?” You're not alone. Many borrowers wonder whether clearing the balance early is the best move, especially when weighing interest savings, ownership, and long-term financial goals.
Let’s break down what happens when you pay off your car finance early and whether it’s right for your situation.
👉 The big upside: save money on interest
👉 Improve your credit profile (eventually)
👉 Lower risk of negative equity
👉 The common downsides: what to watch for
👉 When paying early actually makes sense
👉 Should you pay off car finance early?
👉 FAQs: paying off car finance early
One of the most appealing reasons to settle your car finance early is interest savings. If your loan doesn't have a fixed interest charge, anything left on the balance saves interest when you pay it off ahead of schedule. It’s simple: pay less over time by borrowing less overall.
With Hire Purchase (HP) agreements, you don’t legally own the car until the final payment. Paying off early moves ownership into your hands sooner… no more monthly commitment, just your car fully yours.
Clearing a debt usually helps your credit health over time: it reduces your debt-to-income ratio and shows you can manage and pay off credit responsibly. But note, credit scores might dip briefly when an active account closes. The good news? It normally rebounds quickly with responsible credit use.
Let’s say you’re upside-down on your loan (owing more than the car’s worth). Paying it down faster reduces that gap, which is helpful if you’re considering resale or dealing with unexpected events.
1. Possible Early Repayment Charges
Some lenders include early repayment penalties, which may equate to one or two months’ interest. These fees can significantly reduce the benefit of paying early, so always check your contract or call your lender first.
2. Opportunity Cost: Better Uses for Your Money?
If your loan interest is low, you might get better returns by investing, building an emergency fund, or paying off higher-rate debts first (e.g. credit cards).
3. Cash Flow Risk
Writing a big cheque could leave you short for unexpected costs. Make sure you’ll still have a healthy buffer before clearing the balance.
4. Minimal Benefit Near the End of the Term
If your finance agreement is nearly done, the interest remaining may be minimal, so lumping the balance may not be worth it.
Consider paying off early if:
A temporary dip in your credit score can happen following a loan payoff, because you’re closing an active credit account. However, this tends to recover and may actually benefit your credit in the long term by eliminating debt and improving your finance profile.
Paying off your car finance early can be a smart financial move, if your agreement doesn’t penalise you and you’re confident you’re not sacrificing bigger priorities like savings, investments, or paying down higher-rate debt. Done right, it frees your mind, frees your budget, and gives you true ownership.
Need help figuring out your settlement figure or thinking about refinancing? Reach out to the Marsh Finance team today, we’ll walk you through your options.