Can you pay off your car loan early?
Posted on March 27, 2019
Buying a new car is always an exciting time. Whether that’s brand new or approved used, the excitement in the air is palpable as customers sign on the line with great big smiles as we hand over the keys. It’s one of the reasons I love this industry. As many buyers use car loans to finance their purchase, is it possible to pay that loan off early?
Yes it is and there are advantages to doing so if you can.
You will pay less interest over the term, the completed loan will be recorded on your credit report and you have more money at the end of each month to spend elsewhere!
Early car loan settlement
We try to predict as much as possible what the future holds when applying for a car loan but sometimes good things happen as well as bad. We can come into money, accrue overtime or get a bonus. We could have a lottery win or something else entirely. With savings interest rates at an all time low, it makes better sense to settle debts than it does to save.
Car loans typically use compound interest. This means interest is charged at an annual rate that accrues over time. Settle that loan early and you pay less interest. Any interest charged will be up to that point and not the interest over the term which could result in a significant saving!
Credit report benefits
Paying a loan off early can benefit your credit record too. You will have a completed loan marked there and will have reduced your debt. If you want to apply for more credit then the earnings to debt ratio will have been lowered, making the lender more likely to agree the finance. That alone won’t swing the decision but it will positively influence it.
More monthly money
We would all like a little more money in our pockets at the end of the month. Paying off your car loan early is a good way to free up money for something else. You are not only saving a monthly payment, you are also saving the interest that would have been charged over the term of your loan.
When considering whether to pay off your car loan early or not, check the small print first. Most loans will not have minimum periods or early settlement penalties but we have heard of some that do. Check the paperwork and make sure you won’t be penalized for paying off early. Most reputable lenders won’t charge you but it is still worth checking!