Financing a vehicle can help you get access to the car of your dreams, but it also means you'll be taking on new debt. Interest on your debt will mean you pay more than the cost of the car, and the longer interest accrues, the more you'll pay. Paying off your car loan early by making more than the minimum monthly payment can save you some money, but you might be penalized by your lender.
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As long as your loan terms do not penalize you for prepayments, you can pay extra each month to bring down your total balance much quicker.
Paying off your car early means you'll get rid of debt, and this can provide some financial peace. It can also save you money. Every month, interest accrues on your loan, and paying your loan faster means you'll pay less interest over the life of the loan. Depending upon the terms of your agreement, though, you might not save much. Auto lenders frequently offer low financing rates. Check your loan agreement to get an estimate of how much you pay over the life of your loan. If it's only a few hundred dollars, you won't save much with early repayment.
Your financing agreement is the contract you signed when you drove your new car off the lot, and it is the best source for learning about payment arrangements. You're controlled by the terms of your contract, so if your contract has a penalty for early repayment -- or prohibits it outright -- you're stuck with these terms. If you refinance your loan, however, you might be able to get different payment terms and pay off your car early.
If your loan says you can't repay early, you'll likely be stuck with repayment penalties. These can range from an increase in your interest rate to a charge for the full amount of interest you'd be paying if you had taken your time with repayment. Your car lender can't outright prohibit you from repaying your loan early, but the lender can make it a financially unsavvy decision.
Another option for paying down your loan early is to make multiple payments each month. For example, if your monthly payment is $400 due on the 15th, you could make one payment of $200 on the first, and another on the 15th. This can slightly reduce the amount you'll pay in interest, but as with early repayment, you'll have to check the terms of your loan to see if it's allowed. Your bank might not accept partial payments.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.