Your car loan is finally approved? Congrats! But before you hit on a road trip, there are a few in’s and out’s of an auto lease that you need to mull over first.
Getting your car loan application approved is only the first step in obtaining your dream car. The most challenging part of the process is paying back the loan.
Sure, it sounds nice to drive now and pay later. But having a debt to finance a depreciating asset like a car may not be a good set up for you. Otherwise, you can just commit to paying off your car loan early.
What’s Good About Paying a Car Loan Early?
Paying your car loan off as early as possible can save you a significant amount in interest, bigger than that of a loan with a longer-term. Also, settling the loan out of the way in the shortest amount of time possible can lead to more money available for savings, bills, and other expenses.
Besides saving money, paying off your car loan can also give peace of mind and will take a big burden off your shoulder. You can sleep peacefully at night because you don’t have a big debt to pay anymore.
How can you make it happen? Take your cue from the following.
Find Out If There are Early Payment Penalties
Knowing about early payment penalties is the most important step that you need to do first before deciding to speed up your car loan payment.
There are financial institutions who offer early payment fees, so don’t get a car loan from a lender who charges fees for prepayment if you plan to pay off early.
Round-Up Your Payment
Rounding up your payment for a car loan is an effortless and easy way to shave off a few months off from your car loan term. You don’t need a big amount of extra money, but adding more to your payments can help you walk away from your loan as soon as possible.
To give you a clear picture, let’s assume you buy a car for $20,000 and paid 4.25% worth of interest for 60 months. Given these numbers, you’ll pay $371 every month. But, if you’re going to round up the payment to $400, it can shorten the term of your car loan by six months.
The increase might only be a small amount, but it will make a significant difference in the long run.
Make Biweekly Payments Every Month
Car loan payment will only require you to pay once a month, but if you offer a deal with your auto lender, the company might allow you to make biweekly payments.
Biweekly payment’s concept is pretty simple. You will submit half of your car loan payment every two weeks to your lender. Since there are 52 weeks in a year, you’ll make a total of 26 payments annually, or one additional payment per year. Making payments in this manner will help reduce the amount of interest you’re going to pay.
It’s important that you talk about this option with your auto lender first. And again, make sure to inquire about possible prepayment penalties.
Make One Additional Payment Per Year
If you don’t have enough cash flow to make biweekly payments, you can get the same results by making one additional loan payment every year. You can use money from your savings, work bonuses, and tax refund.
Better yet, split your car payment every month by 12 and add the total to every future monthly payment. It will also result in one extra payment per year to help pay off your car loan earlier.
Avoid the Skip Payment Option
There are lenders who allow skipping a payment once or twice a year, which is enticing for some borrowers. However, skipping payment will tack on additional interest and extend your loan by at least one month.
Now if you skip your payment, say four or five times during the life of the loan, expect an added six months to your car term.
Refinance if it Makes Sense
If you financed a car and acquired high-interest rate because your credit is in bad shape, beyond 5 or 6 percent for a car loan is considered high, you can refinance your car loan as you do with a mortgage. But, if you’ve been making timely payments, your credit score has likely improved. So recheck it before you apply for refinancing.
When you refinance with a lower rate, more of your money goes to the actual principal balance, and not just to the interest. It will save you money and can either help you get the car paid off faster or reduce your monthly payment.
If you’ve got a stellar credit score, you may refinance with your current lender. Otherwise, go to a local credit union for auto loan refinancing.
The bottom line here is that paying off your car loan early will save you a great deal of money on interest payments. Just imagine what you can do with the extra money you save from those interests. It can beef up your savings account, help you pay off other debts, give extra money you can use for home improvement projects, save for retirement, to name a few.