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When your financial circumstances allow you to pay off your car loan early, you might be able to save some serious money on interest. But that’s not always the case. There are a few of factors to consider before you dive into an early repayment scheme.
Generally yes, you’re allowed to pay off your car loan early. In fact paying off your loan early can cut down on the total cost of your car, because there’s less time for interest to compound on your loan. However, loans with pre-computed interest ensure that lenders get their full interest payment, regardless of how soon you choose to pay off your loan. In these cases, early repayment can only get you out of debt faster, but you’ll pay the same total amount either way.
It might be a good idea to pay off your car loan early so you can save on interest or get out of debt quicker. There are three main situations where you can benefit the most from repaying early:
How much you can save depends on several factors, including how much time you have left on your term, your loan balance and your interest rate. Use our car loans calculator to learn the difference between repaying your loan according to your current term and paying it off early — if you have no prepayment penalties.
|Loan terms (in years)|
Many car loans use your car as collateral and come with a fixed interest rate. In this case, lenders might place restrictions or fees on early repayments or won’t allow you to repay the loan early at all, because they would otherwise lose money on interest payments.
There are two different approaches to making extra payments or paying your loan off early:
Using these 7 strategies can help you pay off your car loan early and save on interest.
If you find yourself in a better financial position than when you bought your car, and you have a strong credit score, you could refinance your car loan to get a shorter term with a better rate, which will help you to pay off your debt faster.
If allowed, try to make additional payments whenever possible. Making payments every other week, as opposed to twice a month, adds two extra payments per year (you’d make 26 payments instead of 24), which will help you save on interest.
Try to make a few large payments per year when you get extra cash from a bonus, tax refund or a pay raise. Or let’s say that you come in under budget for some other expense, consider putting that extra amount on your car loan too.
Working a few extra hours on the side can help you save up the cash you need to pay off your car early. Even small savings can really add up.
There could be additional savings if you start comparing other car insurance options, especially if you have a record of good driving. Then just apply the money you save to your car loan.
Make a list of personal items that you haven’t used in a long time and decide if you really need them anymore. You may find that they’re better used as cash in your pocket than as junk items taking up space in your home.
Even if, according to the terms of your loan, you don’t owe any interest right now and don’t have to make a payment, never skip one! Missing one of your scheduled payments will delay the repayment of your loan and may cost you more money in the long run.
Your car loan payments will affect how you deal with your loan, so examine them carefully. Before you send a new loan application, make sure you’ve considered the following factors.
If you’re paying a variable interest rate, you should find out when the lender recalculates your interest according to the prime lending rate. Also know that many lenders pre-compute interest on your car loan. This means that the amount of interest you’ll pay by the end of your loan is worked into your payments. Even if you make extra payments, the bulk of it will likely be applied to your interest — not the principal — so you won’t save by paying your car loan off early.
Check if you’re able to make additional payments without penalty or if there’s a cap on how many additional payments you can make. And like with pre-computed interest, you should know how those additional payments are applied.
Most people prefer to set up their payments to be automatically withdrawn from their bank accounts, and some lenders may actually require this. You may be given other options to pay off your loan, such as through an online account with your lender or paying by cheque. However, these comes with extra fees, which could make it more difficult to reduce your balance owing.
Making additional payments on your loan can be a helpful option that can help you save down the road, but it’s not the only feature that lenders have to offer — and it’s not always guaranteed to save you money. Remember to compare car loans, taking into consideration fees, features and rates to find the right one for you.
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