Should you pay your Car Loan off Early?

Many people borrow money to buy a car as they tend to be significantly expensive. It can be that a car is too dear to buy outright and so there is not time to save up for one before it is necessary to buy it or that you are just not that good at saving or do not have the funds and time to wait to pay for it this way.

Once you have a car loan though, you do not have to feel that you are committed to keep it forever. You can pay it off early, in most cases. It might be worth thinking about doing this for a number of reasons.

Check to start with, with your lender, to see whether it is possible for you to be able to pay the loan off early. You may find that you are tied in and cannot, but this is rare. What is more likely is that there will be some sort of penalty for paying it back early. This might come in the form of some sort of fine or charge. This could seem hugely unfair but actually it may just be a modest administration fee or a month’s interest payment. It will change between lenders and so you will need to look in your terms and conditions to see how much it is. It could be easier to just telephone their customer services and ask them to work it out for you.

Once you have this figure then you have the means to calculate whether it will be cheaper for you to pay the loan back early or not. You will need to know how much interest you pay each month and how many repayments you have left. Multiply one by the other and you have the cost of your loan. Then you need to compare that cost with how much you will have to pay to the lender for the privilege of paying the loan off early and decide whether you think that it is worth it. Obviously if it costs you more to pay it off early, then it is not worth doing. However, if you will pay less to pay it off early, then it makes financial sense to do this.

Once you have done this you need to consider how you will pay it off early. It might be that you have the money available and that is why you were trying to decide whether to pay it off. That is great, you can go ahead and do it. However, you may not be in that situation. You might be hoping to pay it off early, but not sure how you will actually afford to do it.

If you have savings, then it can be well worth using those. It is likely that they will be giving you a lower return than you are paying out for your loan. If you compare the interest rates, you will be most likely to see that the interest rate on the savings account is less that the interest rate you are paying on the loan and therefore you would benefit financially if you used the savings to pay off the loan. If you do not have savings or do not have enough then you will need to find another way.

It could be worth asking the lender if you can make bigger repayments each month. If you have a bit of spare money each month, this will enable you to be able to do this and it should help you to pay the loan back much more quickly. They may not allow this though and you may need to put money aside until you have enough of it to be able to pay off the loan in one lump sum. It could be worth opening a savings account to be able to do this and then you will keep the money that you are saving separate and you will be less likely to spend it. You will be able to watch it grow and put all your spare money into it. It can also be wise to put some in it every month when you get paid so that you do not overspend and forget to leave a bit to save. You should soon have enough to pay off the loan.

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