Paying off your car loan ahead of schedule might seem like a quick way to free up extra cash each month, but it's a decision that requires careful consideration. While wiping out that monthly payment can feel like a financial win, it isn't always the most brilliant move for your overall financial health. For some, paying off a car loan early can help reduce debt and save on interest, but for others, it could lead to unexpected penalties or missed opportunities to build credit. In addition to highlighting ways to pay off your car loan, we'll touch on whether it's better to pay off your car loan early or stick with your regular payment plan.
A bigger down payment reduces the total amount you need to borrow for a car loan, meaning you'll pay less in principal and interest on the life of the loan. This makes it easier to pay off the loan early. Also, the monthly payments will be lower; hence, you'll have more flexibility to put extra money towards payment if you aim to pay off your loan faster. Lastly, lenders offer more favorable interest rates when you make a large down payment, which makes your loan more affordable and easier to pay off early.
Knowing the total cost of repaying a car loan, including interest, fees and the overall amount you'll be paying back, lets you see if you can financially accommodate the loan. You can better plan your monthly budget and accommodate payments, which helps avoid falling behind on payments. It also enables you to decide if you should make extra payments or refinance the loan with one that has a lower interest rate. We'll explain how you can refinance a car loan in a few.
Add-ons like extended warranty and service plans increase the car's buying price, which means you'll be borrowing more. As a result, you'll pay more interest over the life of the loan. Monthly payments will also increase. But this doesn't mean you should pass on the add-ons. They provide peace of mind but are often overpriced when bundled with a car loan. The best way is to pay for them separately, which, in most cases, will save you money by keeping your loan amount lower, hence enabling you to pay it off more quickly or within the stipulated time.
Making monthly payments on time not only results in you paying off a car loan but also avoids hefty fees, which can increase the total cost of the loan. It also helps build and maintain a good credit score, resulting in better interest rates on future loans. One way to ensure you never miss a monthly payment is to set up automatic payments and prioritizing vehicle loan payments if you don't have more pressing loans.
Refinancing helps pay off a car loan by lowering the monthly payments if you get a new loan with a lower interest rate. Also, if you're not eligible for a lower interest rate, you can refinance a car loan with newer terms that lower your monthly payments. This helps make the loan easier to afford but can also increase the total amount paid at the end of the loan term.
Putting cash on the line for a one-off payment or several gradual payments makes paying off your car loan easy. If you make a one-time payment, you reduce the balance, shortening the loan term. Another perk of doing so is it frees up monthly cash flow. If you still want to make monthly payments with the cash you put aside, it's still a good idea. This begs the question, should you pay off your car loan earlier? It depends on the lender. Lenders make money from the interest that comes with the monthly payments; repaying earlier means the loan won't accumulate interest. This is why a lender will outline a prepayment penalty in the loan term. If the prepayment penalty plus the outstanding balance is less than the monthly payments compounded, it's worth paying off the loan early and vice versa.
Some lenders offer discounted interest rates to certain borrowers, for example, if you have a good credit score or you've done military service. Autopay discounts are pretty common as well. An autopay discount is a slight reduction on the loan's interest rate that a lender offers when you set up automatic payments from your bank account. A lower interest rate can lead to lower monthly payments and a shorter loan term. Plus, some might waive or reduce specific fees associated with the loan, such as application or origination fees. These savings can contribute to a lower overall loan cost and potentially reduce your monthly payments. This is why shopping around for lenders is important before settling on one.
Paying off your car loan early can be a strategic financial move, but it's not always the best option. The decision of whether to accelerate the payoff process depends on various factors, including your financial situation, the terms of your loan, and your overall financial goals. The most reliable method for paying off the loan is maintaining consistent monthly payments while ensuring they are manageable within your financial plans.
Exotic Car Trader is the fastest growing marketplace built specifically for automotive enthusiasts. Click below to learn how you can sell your car with us.
LEARN MORE
