What Happens If You Pay $100 Extra on Your Car Loan?

Paying $100 extra on your car loan could feel like a small decision, but it could lead to significant financial benefits over the life of the loan. Here’s a breakdown of what happens when you decide to consistently pay an additional $100 toward your car loan:

Immediate Financial Impact

When you pay extra on your car loan, the additional payment is typically applied directly to the principal balance of the loan. The principal is the original amount you borrowed, excluding interest. Since the interest you pay is calculated based on the principal, lowering the principal earlier reduces the amount of interest you'll pay over time.

For example, let’s assume you have a $20,000 car loan at a 5% annual interest rate over a 60-month (5-year) term. Without any extra payments, you would pay around $2,645 in interest over the life of the loan. By consistently paying an additional $100 per month, you not only shorten the loan term but also reduce the total interest paid.

Here’s how it works in a more detailed scenario:

Scenario	Original Loan (No Extra Payments)	Extra $100 Payment
Loan Amount	$20,000	$20,000
Interest Rate	5%	5%
Loan Term (Months)	60	60
Monthly Payment	$377.42	$477.42
Total Interest	$2,645.48	$1,927.80
Loan Duration	60 months	45 months

By paying an extra $100 per month, you cut your loan term by 15 months and save $717.68 in interest.

Psychological Benefits

Debt can feel burdensome, and even though car loans typically have lower interest rates than credit card debt, the psychological burden can be the same. Paying extra can give you a sense of accomplishment as you see the balance decrease faster than anticipated. Over time, this can provide a sense of relief and motivation to tackle other debts or financial goals.

Additionally, the sooner your car loan is paid off, the sooner you free up monthly cash flow. This extra cash can then be redirected toward savings, investments, or other financial priorities.

Flexibility and Freedom

Once the loan is paid off earlier than expected, you own the car outright. This increases your financial flexibility, as the money that once went toward your car payment can be allocated elsewhere. For example, if you were paying $477.42 a month with the extra $100, you could now divert that amount into an emergency fund, retirement savings, or even a down payment for a new car or home.

Beyond the obvious financial flexibility, there’s also the freedom of knowing that you are no longer tied to a loan. This can be incredibly empowering, especially if you’re someone who values living a debt-free lifestyle.

The Effect on Credit Score

While paying off your car loan early doesn’t have a direct negative effect on your credit score, it can influence your credit mix. Credit scoring models like to see a diverse mix of credit accounts, such as installment loans (like car loans) and revolving credit (like credit cards). Closing an installment loan early reduces this mix temporarily. However, if your credit profile is strong in other areas, this reduction in diversity likely won’t have a significant long-term impact.

More importantly, the act of making regular, on-time payments — whether you’re paying extra or not — contributes positively to your payment history, which is the most significant factor in your credit score. As long as you are responsible with other forms of credit, paying off your car loan early should not harm your score.

Should You Always Pay Extra?

While paying extra toward your car loan can save you money on interest and shorten the loan term, it’s essential to assess your broader financial situation. For example:

• Higher-Interest Debt: If you have credit card debt or other high-interest loans, it might make more financial sense to prioritize paying off that debt first, as the interest savings would be greater.
• Emergency Fund: Do you have a sufficient emergency fund? Before making additional payments on your car loan, ensure you have at least three to six months of living expenses saved.
• Investment Opportunities: Depending on market conditions, it might be better to invest that extra $100 instead of putting it toward your loan. For instance, if your car loan interest rate is 4% but you could potentially earn 7-8% in the stock market, investing the money might yield a higher return over time.

Conclusion

Paying an extra $100 on your car loan each month can bring tangible benefits such as reduced interest, shortened loan terms, and increased financial flexibility. However, the decision to pay extra should be made within the context of your overall financial health. Balancing debt repayment with saving, investing, and maintaining a safety net is critical to achieving long-term financial success. If you’re financially stable, paying extra can help you get ahead and save on interest. But if you have higher financial priorities, it may be better to address those first.

Whether you choose to pay extra or not, understanding the impact of your financial decisions helps you take control of your money and your future. And remember: even small changes, like an extra $100 a month, can have a profound effect over time.