Paying Car Loan Early

As long as you have the adequate funds, paying off your car loan earlier than expected will gain you great savings in terms of interest charges. However, the cost-saving benefits that one gets when paying a car loan off early will depend on the terms of the loan.

There are various ways to pay your car loan early. You can opt to pay your loan every two weeks instead of twice a month. In this way, you actually make an additional payment each year, which allows you to save on loan interest. Furthermore, you can apply additional funds in excess of your minimum required payment toward the principal balance of your car loan, making sure you are still in line with your monthly budget.

However, before deciding to pay off your loan early, you must scrutinise your loan documents to determine whether paying everything early will incur penalties on your part. If there are, determine whether such penalties can be offset by the cost-saving benefits that you get when paying your loans early.

Also, determine whether you have a simple or pre-computed interest loan. Simple interest means that the interest is computed from the last payment date to the current payment date. By paying a simple interest loan early, you gain cost-saving benefits. Conversely, a pre-computed interest loan means that your total loan debt includes both your principal amount and the finance charge that has been computed in advance. When paying this type of loan early, you will reduce your debt but have no chance to get away with the finance charges.

Finally, when deciding whether to pay your car loan off early or not especially when you have limited funds, consider whether you are better off without debt or without cash.