How to Pay the Car Loan in Advance
Like many, I hate debt, and the thought of paying a mortgage for a number of years has always left a bad taste in my mouth. While I realize that loans may be needed to buy a house or pay for a college education, I consider the idea of financing objects that unequivocally lose value.
For this reason, I have always decided to pay off my car loans early. This not only improves my monthly cash flow but also improves my credit score.
Benefits of prepaying an early car loan
The bottom line is that prepaying a car loan will save you money on interest payments. Imagine what you can do with extra money: upgrade your savings account, make improvements at home, save for retirement or maybe pay off other debts.
Buying a car loan can also have an impact on credit, as the credit score depends on the level of debt. I had a credit score of 810 when I was approved for funding and, after two months of timely payments, I checked my credit score and found out that he had lost 15 points. I had not lost any payment, nor had I accumulated credit card debts – the decline was entirely due to the new loan I had taken.
I realize that a fall of 15 points is not bad if your score is within the range of 700 to 800 or higher. However, if your score is within the 600 range, 15 points can be the difference between a loan approval and a rejection. Even if your credit score decreases after receiving a new car loan, the sooner you pay it back, the faster you can recover those points.
Ways to speed up the payment of a car loan
Paying cash to buy a car is a way to avoid high interest rates and years of monthly car payments. But if you don’t have the money to pay for your car in full, some simple techniques can help you eliminate your car’s debt faster.
1. Complete the payment
Rolling up the car loan payment is an easy and effortless way to beat the car loan term a few months. You don’t need a lot of extra money, but the more you add to your payments, the sooner you can drop your loan.
To illustrate, let’s say you buy a car for $ 20,000 and you pay 4, 25% interest for 60 months. The planned monthly payment based on these numbers is $ 371. Rolling up the payment at $ 400 reduces the car loan by six months. Take another step forward and increase your payments by $ 100 a month and you can reduce your car loan period by 13 months.
2. Make bi-weekly payments
You are only required to make car loan payments on a monthly basis, but if you enter into an agreement with your auto lender, the company could allow you to pay twice a week.
The concept behind biweekly payments is simple and making payments on this program will eventually reduce how much you pay in interest. Send half of your car loan payment to your lender every two weeks. Because there are 52 weeks a year, this is equivalent to 26 annual payments, or an extra payment per year. Using the illustration above, payments on a two-week schedule are $ 185.30 every two weeks.
Continue with this program for the duration of your car loan and you will shorten your loan by five months. Discuss this option with your car lender first, and be sure to inquire about prepayment penalties.
3. Make an extra payment for one year
If you simply don’t have the cash flow to commit to biweekly payments, you can get the same results by making an additional loan payment per year. Use money from your tax refund and work bonuses, or take money from your savings. Better yet, divide your monthly car payment by 12 and then add this total for each future monthly payment. This also translates into an extra payment per year, and helps repay your car loan a little earlier.
4. Avoid the Skip Payment option
Some lenders allow you to skip the payment once or twice a year. My credit institution encourages you to skip payment options during December and, in the past, I have always taken advantage of these opportunities. However, any skipped payments extend your loan by at least a month and focus on additional interest. Skip your payment four or five times during the life of the loan and you can add six months to the end of your car.
I have rounded up my payments by car since I applied for my last loan, and it has brought good results. With my current payment rate, I will save about $ 200 in interest. I realize that $ 200 is not a huge sum of money over five years; however, the savings of $ 200 in interest will reduce about four or five months from the payment of my car loan. Not bad for such a simple technique.