The key to a successful financial future is paying down your car loan as quickly as possible. Not only will this decrease the amount of interest you pay over the life of your loan, but it can also help you build up your savings and improve your credit score. So how does paying off early affect you? Here take a look at some of the ways that paying off early can benefit you:
Principal reduction
You can save interest by paying off a car loan early. The principal reduction means that you’ll pay quite less in interest over time, which is one way to make your debt more manageable.
In addition to saving money through principal reduction, paying off your car loan quite early can be helpful if you want to refinance or transfer your car loan into another type of loan.
Payoff savings
If you pay off a car loan early, you won’t be making payments on the loan anymore. Instead of paying for the remaining cost of your car loan each month, you can now put that money toward other things—like savings or investing! “Paying off your car loan too early can lower your Debt-to-Income Ratio,” as stated by Lantern by SoFi professionals.
If you decide to pay off your car loan early and have enough left over to save some extra money every month, consider opening an investment account or other type of account where you can store it. There are many different types of investments out there and it might take some time to research before finding one that fits best with your needs and goals.
Credit score boost
You can save substantial interest by paying off your car loan early. This savings can be used to pay down other debts or even invest in financial assets.
In addition to saving money on interest, paying off a car loan early will also improve your credit score by reducing the amount of debt you have on credit accounts and increasing the length of time since you’ve last applied for new credit cards or loans.
Reduced interest rate
If you pay off your car loan early, your lender will likely lower your interest rate. This means that the total amount of interest paid over the course of the loan is reduced as well as each monthly payment. The lower interest rate also means a lower monthly payment because some of the money is being used for paying off the principal rather than interest on each payment.
In other words, if you have an outstanding auto loan with an original balance of $20,000 with an APR (annual percentage rate) at 8% and decide to pay $6,500 toward those payments right away instead of making them in full over 60 months—a common term length—you’ll end up paying significantly less in total interest than if you had only made monthly payments according to their terms without any prepayments or lump sum payments until after 60 months.
The best thing to do is to speak to your lender. You may be able to get the best rate if you pay off your loan early, but there are a lot other factors that can make the decision complicated.