How to Repay a Car Loan Early
Making regular payments on your car loan is a primary way to improve your credit score. But instead of just following the recommended payment schedule for your loan, there are some options open to you to pay off your loan early. Here are some tips on how to pay your loan off early, as well as some advice on whether early repayment is a good idea. To learn more about the nuances of car financing and your specific loan situation, contact our team at North Coast Auto Mall to discuss your options and what the best path is for your current loan.
HOW CAN YOU PAY OFF YOUR AUTO LOAN EARLY?
If you’ve decided that paying off your auto loan early is right for you, you have several options to meet your loan amount early. The first option is to make a large one-time payment to significantly reduce the balance on your loan. If you have the financial resources, such as a tax return or bonus, you can even agree to pay the outstanding cost of the vehicle in full.
Another option is to increase the amount of your monthly payments by rounding them up to the nearest $50. For example, if your regular loan repayment is $215, you could choose to pay $250 instead. Depending on the length of your loan and the amount you borrowed, making payments at this higher level could reduce the length of your loan by several months.
A final option is to pay half of your monthly payment every two weeks. Over the course of a year, this will result in you paying 13 full monthly payments instead of 12, which will reduce the length of your loan.
WHAT ARE THE ADVANTAGES OF EARLY LOAN REPAYMENT?
The advantage of early repayment is that you’ll reduce the amount of money you have to pay on interest. All auto loans consist of the cost of the vehicle, known as the principal amount, and interest, which varies depending on the terms of your loan. Due to the fact that interest builds up over time, paying back your open balance sooner will reduce the total amount of interest you need to pay.
A further advantage of early repayment is that it will reduce your overall level of personal debt. This may make it easier for you to access other types of credit.
CAN EARLY REPAYMENT HURT YOUR CREDIT SCORE?
While you may think that paying back your loan early can only be a good thing, there are some instances where it can harm your credit score. Credit agencies prefer customers to have several open credit accounts that they make regular payments on because this demonstrates that they can manage their credit burden and payment schedules. While an auto loan remains on your credit history after you pay it off, it will no longer appear as an active credit when you’ve repaid it in full. As a result, this can cause credit agencies to reduce your score temporarily, especially if you don’t have many other open types of credit.
A related issue is that credit agencies like to see that you have a good mix of credit. This can include auto loans, mortgages, and credit cards. If you pay off your auto loan and this narrows your credit mix, it can have a negative impact on your credit score.
ARE THERE OTHER DISADVANTAGES OF EARLY REPAYMENT?
Another potential disadvantage you should consider before paying off your loan early is that your lender may charge you a fee. If this is the case, it probably won’t make sense to pay off your loan early if the fee costs you more than the amount you can save on interest. Contact our team to see if this is your situation and discuss your options for early repayment with our staff.
Another potential drawback is that your money may be better spent elsewhere, such as by paying off credit types with a higher interest rate. For example, your auto loan typically has a lower interest rate than a credit card. Therefore, you may want to prioritize paying off credit card debt if you have any before you try to pay off your auto loan early.
WHEN IS IT A GOOD IDEA TO PAY OFF A LOAN EARLY?
It could be a good idea to pay off your loan early if you have a significant amount of savings or disposable cash and you want to save on your interest payments. This is more likely to prove effective early on in the term of your loan. If you wait too long, you’ll already have paid interest on the majority of your loan, which will leave you with less savings to make.
Another situation where paying off your loan early may make sense is if you want to reduce your overall debt burden. This may be necessary, for example, if you’re planning on applying for a mortgage. In order to decide whether you’re a good candidate for a mortgage or loan, one factor lenders look at is your overall debt burden as a percentage of your income. This is often referred to as your debt to income ratio or DTI. If your DTI is too high for the lender’s guidelines, they may be unable to provide you with a loan. You can reduce the risk of this happening by paying off your auto loan early.
IS IT WORTH REFINANCING YOUR CAR LOAN?
Refinancing your loan is when you agree to new loan terms with a lender to pay off an existing line of credit. Refinancing can be arranged with the same lender or a new entity. It makes sense to take this course of action if your credit score has improved since you first took out your auto loan because you may be able to negotiate better terms than you originally had. This could include a reduced loan term, which may help you save money by cutting the overall interest costs.
FIND CAR LOAN ASSISTANCE AND INFORMATION AT MIAMI CAR CREDIT
If you’re looking for fair terms on your next auto loan, reach out to our team at Miami Car Credit. We’re experienced in assisting Florida customers who require financial assistance to purchase a used vehicle. Even if you have a poor credit history, our auto loan experts can work with you to arrange a payment plan that works for you. To learn more about your options, contact us today.