How extra payments work on a car loan
Most auto loans use simple interest: each month's interest is charged on the balance you still owe. The CFPB calls simple interest "far more common" than the alternative, precomputed interest. With simple interest, every extra dollar goes to principal, so the balance falls faster and each later month charges less interest.
A few loans use precomputed interest, where the interest is set at the start and built into the payments. Paying early on those saves less, though you may get a refund of some unearned interest. Your contract says which kind you have.
How it's calculated
Balance = balance + interest − payment, until the balance reaches $0
Interest saved = interest at your current payment − interest with the extra
The calculator runs both schedules month by month in whole cents. Lenders that charge interest daily get slightly different cents, but the savings are very close.
Worked example
You owe $20,000 at 7% and pay $450 a month. Paid as scheduled, the loan ends in 52 months with $3,218.71 of interest. Add $100 a month and it ends in 41 months with $2,544.29 of interest: 11 months sooner and $674.42 saved. Pay a $2,000 lump sum today as well and it ends in 37 months, saving $1,186.27.
Check for a prepayment penalty
The CFPB says your contract and state law decide whether you can pay off an auto loan early, and some states ban prepayment penalties for certain loans. Look for a penalty clause in your contract and Truth in Lending disclosure. If there is one, enter it above and the calculator takes it off the savings.
Best ways to pay off a car loan early
- Add a fixed amount to every payment, and ask the lender to apply it to principal.
- Put windfalls like a tax refund toward the balance as a lump sum.
- Round your payment up to the next $50 or $100.
- Refinance to a lower rate and keep paying the old amount. The auto refinance calculator shows the savings.
- Pay off higher-rate debt first. A credit card at 22% costs more than a car loan at 7%; see the debt payoff calculator.
Limitations
It assumes a fixed rate and that extra money goes to principal straight away. Some lenders apply extra money to the next payment instead unless you tell them otherwise.