Most of the time, banks and other financial institutions who lend money for buying a car allows you to pay off auto loan early, without any prepayment charges.
However, there are some financial institutions which charge you some money if you pay off your car loan earlier, on the pretext that they lose money when you pay off before the due date. So while you apply for a loan, you need to ensure that there are no prepayment penalty.
It's a good thing if you are thinking of paying off car loan early as it gives you that much more money in your pocket. You can opt to increase your monthly payment by some amount instead of the amount specified, or you can pay a lump sum amount towards the principle balance.
Early payoff means shortening the time period of the loan, besides in the long run it decreases the amount of money you have to pay towards interest.
Is it Good to Pay off Car Loan Early?
Paying off car loan early has its own benefits, but you also need to take care of your finances and see to it that you can afford to do that. If you want to pay off car loan early, you need to remember that there are no penalty charges. If there are penalty charges, you may actually be paying more in the long run.
If you are thinking of paying off from your savings which get you interest every month, you need to consider whether you would lose the interest amount you would have gained if the money remained in the bank. And most importantly, if you pay off your loan from your savings, you may be inviting trouble in the long run.
The second most important advantage of paying off car loans early is that it improves your credit score, which in turn would help you if and when you need another loan.
If you want to maximize the benefits of a good credit score, it's advisable to make monthly payments before time for at least 12 to 24 months before the balance is paid off. Moreover, paying off early would free you of a burden so that you can spend on something else.
One big disadvantage of taking a car loan is that it's not tax deductible compared to other loans like home equity loans. For some it may be good to get a home loan so as to pay off your car loan.
However, it would mean that you are just moving your liability to another lender, but on the upside, the interest rates may be lower, and most importantly they would be tax deductible. Nevertheless, there are variable rates of interest on home loans, so be warned.
In case the condition of your car is poor or if it's old, think of paying off your loan as you can save a lot on car insurance. Usually, financial institutions and banks need you to have a collision insurance if you want to get a car loan. If you pay off car loan early, you don't need to pay for the insurance coverage, and that means you save that amount.
Pay off Debt Savings
By paying off the loan you can reduce the ratio between your income and your debt. Try paying the car loan every two weeks instead of once a month as it would save you a lot of money which you would have to otherwise pay towards interest. If you pay once in two weeks, you can save an additional payment every year.
It's a good idea to pay off car loan early, but it's important you go through the loan document before you decide on anything. Also check out if the loan is a simple interest loan or a precomputed interest loan.
If it's a precomputed interest one, the interest is added at the origin of the loan, so you just get the advantage of reducing your debts. So before you pay off your debts, make sure you have got all the calculations right.