Paying off a car loan early comes with some great benefits. It takes a lot of discipline to pay off your debt early. With will and determination, it can be done little by little. It can help your financial future for years to come.
Save money on interest
Interest on a car loan can be added quickly. It is easy to save money by paying your loan early. The amount of interest you pay each month decreases slightly as your balance decreases. Use a depreciation calculator to determine your savings. I like to use the Bankrate auto loan calculator. Fill in your details and click on the depreciation display.
The second to last column tells you the total interest. Scroll down to the bottom and you’ll see the total interest. Now scroll back to where it states “extra monthly payment” type a reasonable number into it. Scroll down to see the total interest you have paid.
Exclude this smaller number from your original number and it will save you interest. The calculator will also tell you a new payment date.
Example: A A USD 15,000 car loan at a 7% interest rate will cost you USD 2821 in interest over a five-year period. Add USD 50 a month to your down payment and you would reduce your credit by 10 months and save USD 487 in interest.
Start saving for your next car
Cars don’t last forever. One thing for sure is that you will eventually need to make another purchase. If you start to save all or at least part of the amount you would pay in monthly payments on your recently paid loan, you can have a significant down payment when the time comes.
Lower your vehicle insurance costs
Once your car loan is paid off, you can re-evaluate your car insurance. If you have paid for your vehicle through financing, lenders require you to pay for your car insurance in full. Now that your car pays off, you have options.
Option 1: Keep vehicle insurance such as. It may not save you money, but if your vehicle is damaged in a car accident, car insurance can help repair the damage.
Option 2: Remove the collision coverage. Collision coverage is the coverage you need when you damage your vehicle and it was your fault. It can also potentially help when someone damages your parked vehicle. Collision coverage is often the most expensive coverage. Look at your accident potential, how much your vehicle is worth, and how much it covers. With all three of this information, you should be able to determine if the cover is right for you. If you cannot decide, you will get advice from your agent. Agents often do not say what to buy, but they can offer guidance in the decision-making process.
Option 3: Remove comprehensive collision coverage and coverage. Comprehensive protection protects against fire, theft, vandalism, flying objects, deer, weather and more. Removing comprehensive coverage would leave you without covering physical damage to your car insurance policy.
Lower the debt-to-income ratio
A good debt-to-income ratio, also known as a small debt-to-income ratio, is important to your financial health. It can significantly affect your future purchases. Purchasing loans such as home and car loans calculate your debt-to-income ratio to determine if you can afford more debt. Paying off debt reduces your debt-to-income ratio. It can also help improve your credit score.
Love living in a free country? It’s very difficult to enjoy it when you can’t go anywhere because your money is locked in payments. Debt is so limited. Car payments will open many opportunities for you and your family. A five-year loan is really too long for a depressing pile of metal.
It is easy to find more because the vehicle is worth it if you are not trying to speed up your payments. You’re going to get into a big accident or decide you want to sell and you’ll have to pay a big lump sum to cover the difference.
When should I not pay for an earlier vehicle?
Let’s say you have a really good interest rate on your USD 10,000 car insurance loan, never carry a balance on your credit cards, and plan to keep full insurance on your vehicle. It seems you’re lucky to receive a check in the mail for USD 10,000. Would you pay the loan?
In most cases, yes. Save your interest in the long term. But if you can find an investment that has a good chance of a higher payout, such as the stock market, it might make sense to park your money there rather than worry about paying off the loan that comes with pretty good terms.