Experts recommend paying off a car loan early if you can afford it. Collins explains that paying off your car loan has a number of tangible benefits. For example, if you pay off your loan early, you can actually save money on interest. Repaying a car loan can also help your monthly budget. After you've paid off your car, you'll have more money to put toward other debts, savings, or expenses.
However, borrowers must always consult with their lenders before paying off a loan early. This can help you keep off the temptation of buying another car. On the other hand, if paying off your car loan is not the best option in the near future, consider refinancing.
There’s definitely more to learn when it comes to repaying your car loan early or at all. Read on to discover more.
Save On Interest
When you pay the principal (the loan amount) and the interest (the cost of borrowing) on an auto loan, you are paying both the principal and the interest (interest and fees). Depending on the terms of your loan contract, paying off your principal early may save you money.
For example, a $20,000 loan amortized over 60 months at 5% interest would cost $22,645 — the principal plus $2,645 in interest. In some cases, paying off this loan early may save you money — but only if you're paying simple or pre-calculated interest.
On a simple-interest loan, you pay interest based on your current balance. The earlier you repay the loan, the less interest you will pay, potentially saving you hundreds of dollars. Paying off your $20,000 loan in four years rather than five saves you $537 in interest.
Precalculated interest is calculated in advance of the loan's start date and is regarded as fixed. As a result, even if you pay off your car loan early, you may still be required to pay interest.
Set Aside Funds for Other Purposes
The extra money saved by paying off your car loan early can be used to pay down other debts, such as a mortgage or student loan, or to save for an emergency.
Don’t Take Out Loans Beyond Your Car’s Worth
Because of the vehicle's depreciation rate, if you take out a long-term loan, you risk owing more than the vehicle is worth. When this happens, you will have negative equity in your vehicle. Thus, early repayment of your car loan may be beneficial.
What to Look Out For: The Prepayment Penalties
Yes, their are prepayment penalties involved when you choose this option. As such, while it may appear that paying off your car loan early is a good way to save money, it is not always the best option.
If you pay off your car loan early, you may face penalties. So, read your car loan contract thoroughly and make sure you check all the details. If this fee is part of your loan, you should weigh the financial benefits of early repayment against the fee.
You can decide whether it is worthwhile to pay off your car loan early after weighing the benefits and drawbacks. Contact your lender to find out the best way to repay your car loan. Note that only a trusted professional can explain and explore options that make sense for you and your financial situation. With the guidance and assistance you need, you’ll be worry-free!
For the best car finance services in Sydney, Wealthy You can help you explore various mortgage solutions that fit your needs. Work with us and set an obligation-free meeting today!