An early car loan payment can be potentialy beneficial since having a car is becoming a necessity these days. Whether you live in an urban or a rural area, owning a car is a must. The availability of quick loans and the growing number of cars on the road have made it easier than ever to get your hands on enough cash to buy one. But is it possible to pay off the loan? And even if it is, what are the implications?
Let’s take an in-depth look at this question, including the pros and cons for those who plan to do this, as well as for their lender who would be expecting interest from them until the end of their loan term. Let’s see if there’s any truth to the claim that paying off your car loan early is a great idea or if it’s just something to keep in mind for those who want to but probably shouldn’t.
Is it possible to pay my loan early?
With modern advances in the field of finance, it’s become easier than ever to get a loan, and even those who can’t get a loan elsewhere can often pay off the loan early. Mwananchi Credit has adopted the practice of “deferred payments” which has made it possible for our to pay off their loan before it is scheduled to end. You may have heard about these loans before.
When you get a car loan, instead of paying off the full amount of the loan in one lump sum, you typically make monthly payments that add up to the full amount at the end of the loan term, which is usually around six or seven years. But there are a few lenders who will allow you to pay the loan off early, meaning that you can pay enough to bring the loan down to a 0% interest rate.
The benefits of Early Car Loan Payment
No more interest
Anyone who owes a loan will usually get charged interest each month. This is how lenders make money when they loan you the money. But it is not what they expect you to pay. If you pay off a loan before the end of the loan term, you avoid this interest completely. So if you can pay off your car loan early, it can be a huge financial boost for your wallet.
Own the car
Paying off your car loan early means you own the car free and clear, rather than the lender. If you ever need to turn around and sell it, you could earn more from that sale than you would if you still had a loan on it because the lender will expect payment first from the sale.
More money in your pocket for other expenses
Paying off the car loan early means you could potentially free up money in your monthly budget, meaning you could have more room to spend on other debts, like student loans or mortgages. you could even save the extra cash for a rainy day.
Easier to get a mortgage
If you want to buy a home in the future, a car loan is an obstacle. You will not qualify for a mortgage if you have a high-interest car loan. The only way to get rid of it is to pay off the loan early. You will then be able to qualify for a low-interest mortgage and get a nice new house.
Improve your DTI
Your debt-to-income(DTI) ratio is how much debt you owe compared to how much money you make. The lower your DTI, the better you look to future creditors and lenders, whether that’s taking out a credit card or buying a home. Paying off your car loan will lower your DTI
Avoid being “upside-down”
It’s not uncommon for someone to owe more on a car than it’s worth. This is what’s known as being “upside-down” on a car loan.
Being upside-down on your loan is a potentially risky situation. If you were in an accident and totaled the car while you were upside down on your loan, you’d have to pay back the lender the worth of the vehicle plus the negative equity. Paying off your car loan early could help mitigate this risk.
The drawbacks of paying off your car loan early
Prepayment penalties
Some lenders charge a penalty for paying off a car loan early. The lender makes money from the interest you pay on your loan each month. Repaying a loan early usually means you won’t pay any more interest, but there could be an early prepayment fee.
The cost of those fees may be more than the interest you’ll pay over the rest of the loan. If that’s the case, it makes more sense to keep making your regular monthly payments instead of paying the loan off early.
Credit score Drop
It can hurt your credit score. When you bring a new loan on your credit report, it will show the amount of the payoff. If you have a low credit score, the payoff amount will stay on your report for a while. But don’t be discouraged. Most of the time, this drop is temporary and you should see a rebound within a few months.
The Money Might Be Better Used Elsewhere
Paying off your car loan early frees up a good chunk of extra cash to keep in your pocket. But it’s important to also look at how much you’re paying monthly for other debts that might be costing you more. Which one has the highest interest rate? If your car loan’s rate is low compared to other types of debt, like credit cards, consider paying off the debt with the highest interest rates first. That way you save more on the total interest owed.
Budget strains
You may not want to pay off your car loan early if it is going to put you in an insecure financial position. Depleting your savings account or making larger monthly payments that you can afford may help you pay off this particular debt faster, but it could make it difficult to cover emergency expenses later.
How to pay off your car loan
Before completely paying off your car loan, review your options to see which one makes the most sense for your financial situation, like:
- Pay off the full amount. To pay off the entire remaining balance, may require a few thousand shillings to be paid at once, depending on how much is left on your car loan balance.
- Pay a partial payment. If the lender allows you, you can make a partial payment, which will shorten the loan term, and in some cases, make it 0% interest
- Boost monthly payments. If you got a raise at work or a passive income, you can increase your monthly payments. This will reduce the number of monthly payments you need to make to repay your car.
When to consider paying off a car loan
This is a big financial decision and you should give it enough thought, just like you did when you first got the car loan. Consider paying off your car if:
- You can afford it. If you don’t have any other major, more expensive financial obligations, paying off your car loan makes sense. You’ll free up money in your budget to put toward other things. But if you don’t have the cash on hand, you may want to explore other options.
- You don’t have other outstanding debt. Look at your budget, including how much you bring in and what you’re paying out. If you want to save on total interest, you may have other types of debt that are a bigger obligation. Credit cards or personal loans often have higher interest rates than car loans, which means you may want to direct extra financial resources there.
- You’re saving for a big purchase. A car purchase itself is a major financial decision, but if you’re trying to save for a home, lowering your DTI ratio and boosting your cash on hand is a big deal. You can do that by paying off your car loan early.
How do i calculate my car loan payment?
To calculate your monthly car loan payment by hand, divide the total loan and interest amount by the loan term (the number of months you have to repay the loan).
There is also loan calculators in different online platforms.
Not everyone has the financial power to make an early car loan payment. If you don’t have the funds to do so, you may want to look into other options. Refinancing your car loan gives you the chance to lower your interest rate and reduce how much interest you pay over the life of the loan. But it could also extend your monthly payments, so it’s important to choose a financial path that fits your situation.
