Find out if you can save time and money by repaying your car loan early.
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How do early repayments work?
Before you take out a car loan, check with the lender to see what penalties or fees it could charge for early repayment. Many car loans are secured — using your car as collateral — and come with a fixed interest rate. In this case lenders place restrictions or fees on early repayments — or won’t allow it at all.
There are two different approaches for early repayments:
- Repaying your entire loan on a variable rate loan. You’ll find fewer restrictions with a variable rate loan. You can typically repay the loan balance without worrying about termination fees — as lenders won’t lose much money from an early repayment.
- Repaying your entire loan during a fixed rate period. This is where you’ll find the most restrictions. Repaying your entire loan involves paying whatever the loan balance is due to the lender during a fixed-rate period. Here you’ll likely pay termination and administration fees to apply to help the lender cover the loss on interest.
What lenders let you pay off your car loan early?
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Strategies to pay off a car loan early
- Refinance your loan. If you find yourself in a better financial position, with a strong credit score, you could refinance your loan to get a shorter term with better rates, paying off your debt in a fraction of the time.
- Additional payments. If allowed, try to make additional payments whenever possible. Making payments every other week adds one extra payment at the end of the year, helping you save on interest.
- Lump sum payments. Try to make a few large payments per year when you get extra cash from a bonus, tax refund or pay raise.
- Get a night job. It may not be ideal, but working a few extra hours at night for some side cash can add up quickly. Plus, the hours spent working eliminates any free time you’d have to spend it.
- Renegotiate your car insurance. There could be additional savings if you start comparing other car insurance options.
- Sell your stuff. Make a list of personal items that you haven’t used in a long time and determine if you need them anymore. You may find that they’d be better as cash in your hand then taking up space in your home.
- Don’t skip payments. Even if a lender allows you to skip a payment, it’s not advised because you’ll accrue interest.
What else should I know about car loan payments?
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:
- How often you make payments. Lenders usually give you the option of making payments weekly, twice a month or monthly — this helps you figure out a budget.
- The flexibility of the payment options. 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.
- How you’ll make payments. Payments are usually drawn out of your bank account with autopay, but you may be given other options to pay off your loan.
Making additional repayments 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. Remember to compare car loans, taking into consideration fees, features and rates to find the right one for you.