Paying the full price for a new or used car upfront is impossible for many buyers. Therefore, taking out a car loan becomes the standard option when purchasing a vehicle. By making a down payment and agreeing to the loan terms, the buyer drives off the lot with a car and only has to pay a portion of the remaining balance per month. Perhaps picking up the payment pace and paying the loan balance early would be wise.
Long Loan Terms and Concerns
Although the buyer could select a two-year term, a shopper could go with a five or six-year duration. Motivating the decision could be the lower payment amount, which would make a monthly budget less stressful. Paying a loan on time over several years may seem like a painless process, but there could be other concerning issues. A closer look might suggest that paying the loan balance earlier would have more upsides than paying the minimum amount each month.
Lenders make money by charging interest, and any loan carried to the full term means the borrower pays more interest. However, paying the loan off sooner cuts down on the overall cost. Even eliminating only a few months off the loan payoff saves money. Therefore, directing a little extra each month to reduce the balance may help.
Refinance to Pay Sooner
Another way to cut costs involves taking out a new loan to pay a pre-existing one with a process called refinancing. According to Lantern Credit, “applicants could qualify for a lower interest rate through refinancing.” Looking for competitive auto refinance rates could help someone interested in eliminating a car loan faster and at less cost. Paying a refinanced loan ahead of schedule could be worthwhile, too.
Owning the Car Sooner
A lien exists on the car’s title when a loan balance remains. That means the borrower doesn’t own the vehicle and won’t own it until the loan balance reaches zero. After paying off the loan, the borrower ends up with a clear title and can do whatever they want with the model. Selling it or trading it in is an option, although the person could drive the car for many years without dealing with any monthly payments.
Improving a Credit Score
Responsible borrowers might not load up their credit card balances, so they don’t experience trouble from a high debt-to-credit ratio. However, the ratio will increase when taking out other loans, including auto loans. When someone owes a lot of money, concerns about how well the person manages finances arise. Credit scores could become lower, although paying back the loan and reducing the balance could improve things. Pay the car off sooner, and you may experience a faster credit score improvement. The same logic applies to anyone with high credit cards or line-of-credit balances, too.
Paying off a car loan early could have many benefits, such as saving money or improving a credit score. Refinancing the loan might make a full payoff easier for those who qualify.