|If you want to pay your car loan off early, there are some great ways to take advantage of this often-beneficial opportunity. It is recommended, however, that you avoid diving in and paying it off without first reviewing your options. Depending on the contract you signed, you might actually be doing yourself more of a disservice than a favor.
Lump Sum or Double Payments
Usually, the best way to pay off a car loan early is by contributing more money to the balance in a shorter period of time, but you have more than one option for finishing up your loan when youíve financed your car.
First, you can double up payments and make them twice a month instead of once. Your second option is to pay the remainder of your loan in one lump sum. Deciding which option is best for you boils down to your level of income and what you can afford to pay, as well as whether there are penalties or charges associated with either option.
Explore the Type of Interest Loan You Have
There are two types of interest loans that you want to consider when deciding whether to pay your auto loan off early: the simple interest loan and the precomputed interest loan. The simple interest loan only adds interest as each payment is due. This means the earlier you complete your repayment, the more interest you will avoid paying, too.
However, if you have a precomputed interest loan, all of your interest was added to the principle balance at the time you financed your car. In this case, when it comes time to pay off your loan, you will have to pay all of the interest with it. This may not be so bad if you only have a few payments left. However, if youíve taken out a 72-month loan, for example, and youíre only in month 25, you will have to pay thousands extra up front in order to pay your car loan off early.
Check for Potential Penalties
Dealers make money by financing your car purchase, so they often donít want you to pay it off before the term is up. Some dealers charge penalties for paying off loans early to make up for the car loan rate payments theyíre losing. Itís a good idea to review your contract and see if there is some sort of fee attached to determine whether paying that penalty is actually worth it financially.
If youíve financed your car and would like to pay your auto loan off early, taking the time you need to explore your options will help you determine if such action is financially sound.