Clearing your car loan early is an excellent financial goal and it can help improve your credit scores and make you financially flexible. However, this calls for outstanding discipline and commitment. Most people look at the amount of money they pay every month and realize how much they can free up if the debt is settled within a short time. Whether this is the most appropriate decision to make depends on several factors. If you have been contemplating whether you should repay the auto loan early, this article looks into a few things you should think about and make an informed decision.
Save money on the interest charged
The interests charges for a loan you took to purchase a car can build up rapidly. But you can save some cash if you pay the principal early. By making regular payments towards the loan, you can lower the amount you pay interest since the principal amount decreases with every payment. Once you have cleared the principal, the interests stop building up.
For instance, if you pay the loan one year earlier than you agreed, you will end up saving the interest amount you would have been charged for that year. Depending on your loan, you can save several thousand but you may want to pay in as early as two years than the agreed time.
Lower the insurance cost
After clearing the car loan, you can change your insurance coverage. When you have acquired the car through an auto loan financing, most lenders will want you to go for full insurance coverage. But after you repay the loan, you are free to take other options.
You might want to retain your current plan considering that insurance providers will repair the vehicle if it’s damaged. On the other hand, you can eliminate collision coverage. This is what you need just in case you crash the car and the fault lies with you. While it can be beneficial if another motorist damages your vehicle when it’s in a parking lot, this is also quite expensive. You should evaluate your situation to see the possibility of causing an accident, the cost of the insurance coverage, and the current value of the car.
You may also remove the comprehensive insurance cover. This coverage guards your vehicle against theft, fire, vandalism, and weather among others. The downside is that you won’t have coverage for physical damage on the car. Nevertheless, you can save money on insurance costs.
When you should pay early
Having a huge emergency fund requires outstanding discipline to save more money. If you already conquered your spending habits, you might consider using some of this money to deal with the car loan. This means that you will enjoy financial freedom and you can embark on saving more money to buy your next vehicle.
Paying nation 21 loans within a short time shows that you are concerned about your scores and it helps you get better credit scores. Your debt to income ratio is critical to your financial profile and it has a significant influence on credit purchases you may want to make in future. This is because a lender will consider your debt to income ratio before approving your request to borrow.
If you managed to refinance the car loan and got a better deal, you are in a better position to pay the loan early. For instance, if the initial loan came with 5% interest but you now have refinanced deal offering you about 2% interest, you can quickly clear the entire loan before its time.
When not to pay early
If you have a limited budget due to low income, student loans, and mortgage loans, you shouldn’t stretch your finances further just because you want to clear this loan early. This is important especially if the car loan has better interest rates compared to other debts weighing you down. Otherwise, straining to pay the loan quickly can drive you further into debt.
Most of the car lenders you find will impose fees and penalties to any borrower who wants to pay the money earlier than agreed. They do this to recover the money lost in the form of interest for the remaining period.
In the long run, paying the auto loan quickly boils down to your financial situation and it can be very unique. If you don’t like walking around with debt, making faster payments can help you have a peace of mind. but from a higher perspective, moving quickly to eliminate the debt will make more sense if you can take the money and use it for something that improves your net worth. For instance, you may invest in good stocks that will gain value quickly or you can eliminate a debt that can cost more in the long run.
Final words
If you want to settle the loan quickly and you are certain there won’t be any hindrances in your way, this can be a good decision. It can benefit your finances in that you have more funds to save for another vehicle or any long-term investment goal.
But if this is a challenging undertaking given your circumstances and the benefits are minimal, you might want to stick to the original plan. But most importantly, always make sure you have a plan to clear the balance within the stipulated time. in addition, you should take your time to shop around for an auto loan to make sure you are getting the best deal.