If you bought a car recently, chances are you got it financed. The life and terms of your loan depend on a number of factors, including how much money you put down, your monthly income, and the type of car. Regardless of whether you got a three-year loan or a seven-year loan, paying off the car loan in full, whether early or on time, will likely deliver powerful benefits to your finances and your credit score.
When you pay your car loan off in full, you'll experience an increase in your credit score, a decrease in your insurance payments and a reduced burden on your monthly budget.
Credit Score Advantages
Satisfying your debt obligations on time and in accordance with your loan agreement will result in a positive entry on your credit report. This is true whether you pay the loan off early or over the original term of the loan. If you are considering paying the loan off early, you might be better off making a series of regular monthly payments first if you want to improve your credit score. Doing so allows you to build a record of making monthly payments on time, which shows responsible credit management. For the most benefit to your credit score, make monthly payments on time for as long as you can before paying it off.
Monthly Budgeting Ease
Some people have a habit of trading in a car for another one before the loan is paid off, which usually means they have a new car loan to deal with. But there are advantages to paying off the loan on your car and driving it for a while longer before trading it in for another model. Paying off your loan will remove this monthly expenditure from your budget, which can ease your cash flow. When you no longer have a car payment to make, you can use that money to pay down other debt or put it into savings.
When you finance a car, the bank typically has requirements for insurance coverage for the vehicle. While you are paying off the car, the lender will make you keep full insurance coverage on it, which can be pricy. After you finish your loan payments, you can make some changes to your insurance coverage. These include raising your deductible and modifying your collision or comprehensive insurance coverage that will cover damage to your car in various accident scenarios. Making these coverage adjustments can lower your premiums, though you run the risk of greater financial loss if you have an accident that isn’t covered by insurance.
Early Pay-Off Savings
Depending on your loan terms, you might save money by paying off your car loan early. Two types of car loans exist: “pre-computed loans” and “simple interest loans.” With a pre-computed loan, the interest for the term of the loan becomes a part of each payment, which means that you will pay the entire amount of interest for the life of the loan, even if you pay it off early. With a simple interest loan, you pay the interest as it accrues on the money you owe. If you pay this loan early, you will shave off interest paid due to the shorter loan period. Find out which loan type you have to determine whether you can save money with early repayment. Also, find out about any prepayment penalty fees to determine how much it might cost you to pay off your car loan early.