Should you Pay off your Auto Loan Early?
Being debt-free is a dream for many. It is great to use your entire paycheck the way you want to use, instead of making payments to your auto lender. If you have a lot of debt and want to get rid of a few of your liabilities, you can create a plan and start paying off your auto loan.
It is a great idea to use your additional income towards improving your financial situation. But, before sending out additional payments to the lender, you must keep a few things in mind.
Not every Auto Loan Contract is Same
Your friend may have started making bi-monthly payments to pay off the loan quicker and may advise you to do the same. However, not every auto loan contract is the same. What worked for your friend may not work for you. You should study your auto loan contract in detail and act wisely.
Are you allowed to make early payments?
Is there any pre-payment penalty involved for paying off the loan early?
It is important to understand the terms of your contract. If the lender doesn't allow pre-payment, you may have to think of other ways such as refinancing the loan for better rates and terms.
Talk to your Lender
It is not practical to make additional payments without knowing how the lender will use them. By taking a look at your auto loan contract, you will be able to know whether you are paying simple interest or compound interest. Also, check if the lender has included precomputed interest on your loan.
In such a situation, the lender will not direct additional payments towards the principal amount, but he will use it for the total interest amount that he has already calculated. Only when he uses the money to reduce the principal amount, your interest amount will go down. So, talk to your lender. Understand his policy on principal-only payment.
Look for other Solutions?
If there is a pre-penalty clause in the contract or the lender doesn't offer you the option of principal-only payment, you may refinance the car loan. But, refinancing option is not ideal for people with bad credit. If your credit score is not considered good by the lenders, they will not offer a favorable loan term.
In such a situation, you should start by saving the money. Open a savings account and put the additional money in the bank. Once you have a considerable amount saved with you, simply pay off the loan amount and enjoy your car without any liens on it.
With the increase in pay or a large tax refund, you may think of getting rid of your auto loan as quickly as possible. But, making a hasty decision without considering your auto loan contract, future expenses and your credit score can become a nightmare for you. So, consider all the aspects of your financial life before making any changes to the monthly payments.
:- Posted by Admin on 29th June, 2022