With the rising cost of living, it is becoming more difficult for people to repay their car loans. However, many borrowers ignore the benefits of repaying their auto loan early and continue with their regular monthly payments. Should I pay off my car loan early? If you are among those who are paying off your car loan in a timely manner, then here are some reasons why paying off your vehicle faster may help:
You will be saving money on interest
One reason you should repay your auto loan early is that it will save you good money in the long run. The more money you can pay off before the end of your loan term, the less interest will be charged to your account. Also, as a result of paying off a large portion of your balance early on, you can avoid having to make additional payments (like an amortization table) because all of the principal has already been paid off by then.
You might get a lower rate on your next car loan
It’s important to review your finances and budget before you make the decision to pay off your auto loan early. If you are financially stable, paying off your car loan early is a good idea.
Your lender will see this as a positive sign that you are responsible and trustworthy when they look at the interest rates they give out in future loans.
You can build up your credit score faster
You can build up your credit score faster when you pay off your car loan early. On average, a credit score is determined by the following:
- Your payment history (35%)
- The amount of debt you owe (30%)
- The length of time that has passed since the account was opened (15%)
- New accounts opened recently (10%)
If you pay off your debt and then immediately apply for another loan or credit card, it will reflect on the report as an “inquiry” and could lower your credit score by as much as 5 points. If this happens too often, over time, it will significantly impact how lenders view your ability to repay them.
The sooner you pay your loan, the more you save
So, the sooner you pay your loan, the more you save! The longer it takes to repay your auto loan, the more interest will be charged and the less money you have available for other things. For example: if your car costs $50k with a 4-year loan at 2.4% APR for a total of $1,346 per month (which is about average), then by making only minimum payments over four years would cost an extra $8,300 in interest. If, instead, you were able to pay off your balance within three years instead of four, it would save an additional $20k in interest charges.
According to Lantern by SoFi experts, “Prepayment can also help you avoid an upside-down loan.”
As you can see, there are many benefits to paying off your auto loan early. Whether it’s because you want to build credit or save money on interest, repaying your car loan sooner rather than later is a smart move that will help you down the line.