When you finance an auto loan, it’s usually for a set period called the loan term. Some loans will allow you to reduce that period using overpayments, so if you want to pay the auto loan off early, you often can.
This post will walk you through everything you need to know about how to pay off a car loan early.
Check Your Loan Paperwork
As we mentioned at the top, not all lenders will allow overpayments. Some will flat out not allow it while others will charge early repayment fees.
Before you do anything else, check your loan paperwork or talk to your lender about what you can do with your loan. The majority of lenders we work with will allow overpayments. Some specialist loans or bad credit car loans don’t so it’s worth checking before you incur any penalties.
Set Your Overpayment Budget
Once you know whether you can overpay your auto loan or not, you can budget for it. If you don’t have much spare each month, check your household budget to see if there’s an easy saving you can make each month.
Whatever you manage to set aside, you can use directly with the loan, hopefully, without impacting your lifestyle too much.
Choose the Type of Overpayment that Suits you
With a budget in hand, you should now have a good idea of how much you could overpay. If you have cash in the bank, this opens up other avenues for paying off your auto loan early.
Three Main Ways to Pay Off That Loan Early:
Monthly overpayments: Increasing your monthly payment even slightly can pay it off earlier than you might think while also saving interest. If you made a saving using your household budget, add whatever you save to your monthly payment.
Over time, this will pay off the loan faster than you would otherwise have done.
Lump sum overpayment: If you have cash in the bank that you won’t need for emergencies, you can make a lump sum overpayment. Exactly how you do this depends on the lender but typically you would write a cheque or transfer a fixed amount into your auto loan account to pay it off.
Each lender goes about these overpayments in different ways so check with yours to see how they work.
Early loan repayment: Early loan repayment is a popular way to get out of your car loan early. Contact your lender and ask for a settlement figure, pay that figure using the lender’s preferred method and you’re free and clear.
One thing to note with all of these methods, make sure any monthly or lump sum overpayment comes off the principal, that’s the amount you borrowed, and not the interest!
Don’t worry if you can only afford a small monthly overpayment. If you don’t have more expensive debts to pay off, every little helps. Even dropping a couple of months from the term of the loan could save a couple hundred dollars on interest!
Hopefully you now know how to pay off a car loan early! If you have any more questions, please be sure to contact us here.
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!