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The benefits of paying off a car loan early

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The benefits of paying off a car loan early

A car loan is a significant responsibility and a decent monthly outgoing. That’s even more true if you treated yourself to something special this time round. While car loans are generally for a fixed term, there is nothing stopping you paying it off early. In fact, there are some benefits to doing that.

Aside from the obvious benefit of not having a car loan payment going out every month, there are some other benefits to paying off your car loan early.

You can buy a newer car

The second most obvious benefit of paying off your car loan is so you can get another. This might not always be necessary but you now have a history of paying a loan, more free cash at the end of each month and a much lower loan to earnings ratio. This leaves the door open for another car loan should you want one.

It’s finally, truly yours

While you technically own the car once you have paid for it, it’s only really yours once any finance has been settled. While a minor benefit, it can have a significant psychological value. Knowing the car is all yours, that there is no finance outstanding and that nobody can take it away from you can be a powerful force for good in your life.

If you’re content with the car you have you can relax knowing your car is paid off and you have one less debt to service. This alone can be worth the effort of early repayment!

Lower debt to income ratio

I mentioned this a minute ago but it’s worth restating as it can be very useful. As part of a lender’s decision-making, the amount of debt you have is compared to your income. The lower the debt you have, the more likely you are to be approved for a car loan at a lower interest rate. Paying off that car loan means your debt to income ratio is reduced.

If you’re planning another loan, a mortgage or other financial commitment, this can make a big difference to the deal you’re offered.

Save more

Most Canadians don’t have enough in savings to cope with emergencies or for if something goes wrong. Not having a car loan going out each month could change that. In an ideal world, we would all have enough cash in savings to be able to cope with 3-6 months of total household outgoings in case anything happened. Not many of us have that luxury.

This could be your opportunity to change that. Having savings is another psychological boost as well as a real life safety blanket. For that reason alone it’s worth banking a few former car payments to keep around for emergencies.

Know of any other good reasons for paying a car loan off early? Tell us about them in the comments section if you do!

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