Early Birds Win: Why You Should Pay Off Your Car Loan Faster
Congratulations! You’ve been approved for an auto loan. But that’s just the beginning. Although it’s good to look at it with bright-eyed optimism, keep the responsibilities you have towards financing firmly planted in your mind. With that said, you should make the effort to pay off your loan as early as possible. There are many reasons for doing so.
The Benefits of Early Loan Shrinkage
Like all other financial commitments, there are obvious benefits to paying off your car faster, such as the counter-effects that fast payments have on car depreciation. These advantages affect not only your wallet, but your personal well-being as well.
Pay less in the long run
Have you ever seen a pot with a cover that keeps boiling over? You adjust the stove, but the lid is always ready to shoot off. That’s what interest is like when applied to a car loan. If you’re always making the minimum payments, the compounding interest rates will only add to your existing debt. However, if you can pay it off faster, you won’t have to pay as much as interest, meaning the final costs of the loan will be less. It goes without saying, that you’ll have more money in your pockets.
Improve your credit score
Are you trying to figure out how to raise your credit score or avoid a drop? Then paying your auto loan faster can be the solution. Credit agencies and lenders take a good look at your liabilities (debts), taking into account (excuse the pun) the amounts you owe, and as well as the means in which you pay them. When they see large, lingering debts, they might view you as a risk since it seems you can’t handle your debts in a timely manner. That’s why it’s ideal to pay off auto loans and other significant debts sooner than later.
Put your mind at a state of peace
Ultimately, there’s a sense of freedom, knowing your debts are dwindling. Remember those days in school when you left a term-ending project for the last minute? Or a work assignment a day or two before the deadline? Didn’t it stress you out? Likewise, a car loan that amounts to thousands of dollars can do the same if you’re not paying for it in time. And in a world where there’s so much to worry about, you deserve to have fewer worries. So do yourself a favour by trying to shrink your loan as fast as possible. You’ll thank yourself in the long run!
Putting a Pin to the Bubble
So how do you do it? You’ve got bills flying at you from all directions, and it just seems like you can’t get them paid off. For starters, you should take time to revise your budget if things seem difficult. If that still doesn’t help, consider speaking to your financial advisor or a debt counsellor for help. However, if you think handling your car loan in a more speedy fashion is possible, then read on to see what you can do.
Pay more frequently
This is a pretty simple concept. The more frequently you pay, the fast the size of your loan shrinks. There are two main ways to make this possible, if this seems like an option you want to consider. The first one is to pay bi-weekly instead of monthly. In theory, if you were to make payments with equal amounts, you could cut the time originally needed to pay the loan off in half. Of course, you don’t have to pay it off in this manner, but you can reduce the length of your loan by making two payments. The second way to do this is to pay more frequently throughout the year. You might not be able to pay off your loan using the bi-weekly system, but you could be in a position to make an extra payment at odd times during the year. This method can also help you cut the time needed to pay your loan off completely.
Round up your payment
Let’s say you can only stick to making one payment a month, but can spare a few extra dollars for your loan. Rounding up can be a great option for you. Essentially, it works like this – if you’re paying a certain amount per month, let’s say $280, you can increase that payment to $300. Here’s a more detailed example. You pick up a loan for $25,000 over a period of 60 months (5 years) at a rate of 5% interest. Your monthly payment would amount to $471.78 a month. However, if you rounded that up to $500 a month, your original term of 60 months would shrink to 56 months. Of course, you pay a bit more – $517.96 – and you could get 6 months (54 month term) shaved off.
Avoid the skip payment option
Lenders can definitely be lenient at times. They do this by giving you a skip payment option once or twice a year. While it can serve as a helpful feature during difficult times, you’ll want to use this “lifeline” only if you truly need to. Staying away from this option will allow you pay off your loan faster. Think of it this way – if you take advantage of this feature twice a year for three years out of a five or six year term, you will add six months of payments to your term. Remember, these aren’t free months. Rather, they’re breaks or “freezes” that get added on for a later date (also, allowing interest to accumulate.
Finishing the Race Without Falling
Admittedly, attempting to pay off a car loan faster is a bit of a challenge, and it will take some effort on your part. Committing to such a plan is similar to people who are trying to quit smoking, or remain consistent at the gym. That’s why you’ll need some willpower to stay on track.
Tips for staying committed
- Tweak your budget to fit your new plan
- Write down the benefits of why you’re doing this (and look at it everyday)
- Set up automatic payments (to avoid urge of deviating from the schedule)
- Cut back on unnecessary expenses
- Reward and treat yourself every few months for remaining consistent
Full Speed Ahead!
And there it is – the not-so-secret advice to paying off your auto loan faster than normal. It’s by no means a necessity, but there are benefits of doing so. As mentioned earlier in this post, you will ease your financial and emotional burdens knowing you owe less. So if you ever ask “should I pay off my car loan early?”, the answer will always be yes, as long as your circumstances permit. Ultimately, how you do so will be completely up to you.