Sometimes paying off your auto loan when financing a car can be a decision that some would rather avoid – especially if there are other bills to consider in the budget. However, auto loans are major expenses that very often result in tons of extra money being paid in interest. So if you’re tired of “investing” in your vehicle month after month, you may want to consider paying off your loan early.
Benefits of Paying Off Your Auto Loan Early
There are a number of benefits that can arise from you taking the step to pay your loan off when financing a car. Probably the most beneficial aspect is that you can save yourself hundreds of dollars on your interest charges. Also, for credit report purposes, you benefit from reducing your debt-to-income ratio significantly.
How to Pay Off Your Auto Loan
There are a number of ways that you can go about paying off your loan. Let’s look at what a few of them are:
- Make bi-weekly payments. One way to quickly reduce and eventually pay your auto loan off is by doubling up on the payments.
- Pay it off in total. Another option that you can consider is saving your money up and paying it off in one lump sum.
Consider Types of Interest Loans
However, before you dedicate yourself to paying off your loan early, it’s important that you consider the type of loan you currently have. You might currently hold the simple interest loan or the precomputed interest loan. Let’s look more closely at the two:
- Simple interest loan. This type of loan, unlike an ad on auto loan, will save you money if you pay it off early because you will forgo the interest you would have paid throughout the life of your loan.
- Precomputed interest loan. The precomputed interest loan, on the other hand, adds all of the interest at the beginning. So you’re not forgoing the interest by paying early, but you are getting the debt out of your hands.
Lastly, when financing a car you’ll want to consider whether your lender will charge you a penalty for early pay-off. Depending on whether you will be charged a penalty – and how much that penalty is – you may want to avoid paying off your loan early.