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Auto loans make it easy for you to buy a car. Once you buy a car on loan, you can repay the borrowed amount in installments that can extend up to 84 months. Easy, right? Well, yes, but you will also be paying a substantial amount of interest over the course of the loan term if you do this. So, it’s in your best interest to repay your loan early. Here’s how you can do it.
- Check if the loan has a prepayment penalty: Some lenders will charge you a prepayment fee when you try to prepay the loan. If your loan has a prepayment fee, it is important to work out whether the savings from closing the loan early will offset the cost of repaying it.
- Consider loan refinancing: If you are unhappy with the terms of your loan, you may want to consider loan refinancing, which involves replacing your current loan with a new one that has better terms or a lower interest rate. Refinancing to a loan with a lower interest rate could help you save money and repay your loan a lot faster.
- Make additional payments toward the principal: Sometimes, when you make additional payments toward your loan, the lender will automatically apply it to the interest and not the principal. So, although you pay extra, the overall cost of the loan will not change. This is of little benefit to you, so ensure that you ask the lender to specifically apply your payment to the principal.
- Make bi-weekly payments: Rather than making a single payment every month toward the loan, consider splitting it into two payments. This will essentially keep the loan balance decreasing continuously, helping you save on interest over time.
- Put extra income toward the loan: If you happen to get a bonus or if your income increases, consider putting some of the additional income toward the loan. However, if you have other debts with a higher interest, you may want to clear off those debts first.
Repaying your auto loan early takes a good amount of discipline. However, committing to repaying your debt as fast as possible can help you be free of debt quickly.