There are undoubtedly benefits to paying off your car loan early. For one, you’ll finally be out of debt! But there is a dark side to this financial freedom, as we explain in our guide below. So before you hand over your hard-earned cash and eliminate your car loan from your life, check out the pros and cons of doing so. What you’re about to learn may shock you.
The most obvious benefit of paying off your car loan early is that you will no longer need to hand your money over to a lender. However, there’s another benefit that comes with doing so, and it’s all about interest. The sooner you’re able to pay off your car loan, the less interest you’ll have to pay. Since there are no more payments due after you pay off your loan, interest can’t accumulate. Thus, you’ll save money in the long run by eliminating mounting interest fees. What’s more, think of the extra you’ll have now that it isn’t going to paying interest, let alone your base loan payment.
One of the main reasons some people have less-than-stellar credit scores is because they were late on payments or missed them altogether. By eliminating your car loan, you no longer have to worry about your credit score being affected by such occurrences. Not only that, but your debt-to-income ratio can also be lowered. This ratio is a metric that lenders rely on to determine credit decisions. For example, paying off your car loan early now could mean better home mortgage terms later.
There’s no question; the sooner you eliminate your car loan, the sooner you’ll be free from debt. And when you’re free from debt, you’ll be able to finally enjoy financial freedom. The benefits this brings with it cannot be overstated. Those who have finally been released from the bondage of debt will tell you that it feels like a weight is lifted from your shoulders. Debt can cause fear, worry, anxiety, insomnia, stress, and more. When you owe a lender money, your freedoms are at risk. If you miss your payments, you stand to lose your vehicle or other assets. And with the current state of things, this stress and worry are all too real. Fortunately, the pandemic has given rise to wiser budgeting tactics across the country, with families recognizing the importance of good credit. If you are struggling with anxiety over your debts and you’re in a position where you can afford to pay off your car loan early, you might just want to take advantage of doing so. To be sure that it’s the best move, though, read on to find out what the cons are of paying off your loan early.
Paying off your car loan early can undoubtedly be a big relief. However, it shouldn’t get in the way of larger life goals, like saving for retirement or investing in your children’s college fund. Perhaps even more importantly, you should always be building your emergency savings . The need for an emergency savings fund can’t be stressed enough. You never know what kind of surprises life can bring your way. Certainly, there are some surprises that are welcomed and wanted, such as a new baby. But there are also many challenges that life can present that can really put you in a tight spot if you aren’t financially prepared. Almost all of us have experienced car trouble or a broken appliance. Some have even suffered a major illness or injury. With an emergency fund in place, you can help offset the impact these things have on your life. If you don’t already have an emergency fund started, try your best to get one established right away. If your financial situation is in good enough shape and you have plenty of savings to cover your debt for six months, you can work toward steadily paying it down.
As unfortunate as it is, some lenders actually penalize you for paying off your loan early. True, you could still be saving a sizable sum of money on interest. But if the lender’s penalty fees outweigh those savings, you’re better off sticking to your regular monthly payments. As such, it’s crucial that you fully understand the terms of your loan and all that it entails. Before agreeing to any type of loan, always make sure that you ask about any penalties for paying the loan off early. This could help you avoid a major kerfuffle later on.
Did you know that for every 10 people, nearly seven of them borrow money to pay for their car? Furthermore, most car loans average a term of five to six years. That’s a lengthy financial obligation to have behind you. Thankfully, you have some options to get that loan resolved sooner rather than later. Follow these tips to regain your financial freedom and get out from under the thumb of your lender.
If your lender allows it, you should jump on this option. When you make a payment every two weeks instead of once a month, you will end up with 26 half-payments a year. As such, you’ll be paying a total of 13 payments a year instead of 12. If you have a five-year loan for $10,000 loan, for example, you will only save around $35 in interest. However, you’ll repay the loan much sooner, as in 54 months instead of 60. That freedom six months sooner. And if you get paid every two weeks, it’ll be easier to budget.
Instead of paying only what is recommended, try rounding up your payments to the nearest $50. This will help you repay your car loan a lot faster. Let’s assume that you borrowed $10,000 with 10% interest for five years. Your monthly payment will equal $212.47. As the payment, you will pay off your car loan in exactly five years. What’s more, you will have also paid interest to the tune of $2,748.23. Now, if you instead decide to round up your payments to $250 a month, you will repay your auto loan in just 47 months. Not only will you have paid it off three months earlier, but you will have paid interest in the amount of $2,214.69. That’s $533.54 in savings. Not bad!
With this option, you’re going to be rounding up your payment, but just once and in the form of one big lump sum. In this case, we’ll assume the same loan amount and terms apply, but with you making a one-time payment of $500 over the course of your loan. By doing this, you’ll repay your loan in 49 months and pay $2,279.35 in interest. What’s more, you will have saved $468.88 in interest.
When you make at least one sizable payment a year on top of your regular monthly payments, you will benefit by saving even more in interest. But remember, the sooner that you make that big payment, the sooner your car loan can be paid off.
Making on-time payments means sticking to the length of your term. Any missed payments will only serve to extend your term and have you in debt that much longer.
Only refinance if it’s going to lower your monthly payment and allow you to pay off your loan sooner. Otherwise, you could find yourself locked into an even longer term. This is the last thing you want to happen.
Gaining financial freedom can feel like the weight of the world is lifted off of your shoulders. It’s understandable that you would want to rush your loan and experience this freedom sooner rather than later. But as you’ve just learned, this can come with heavy consequences depending on your lender’s terms. Therefore, you should check to make sure that you can pay off your loan early and that you won’t be penalized for doing so. Even if you can save a small fortune on interest , it won’t matter if your lender is going to charge more in penalties than what your interest savings comes out to. For more information on loans, be sure to check out our blog page . There, we have compiled a huge selection of beneficial resources that is sure to help you make the best financial decisions. And if you need any assistance from our financial specialists, please feel free to contact us any time. We are happy to help you with all of your loan needs. We look forward to serving you and hope to hear from you soon. Sources https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/ https://www.daveramsey.com/blog/quick-guide-to-your-emergency-fund https://www.daveramsey.com/blog/what-is-financial-freedom