A car loan can feel like a never-ending financial commitment. By the time you pay it off, your car is due for an upgrade – and a new loan!
But what if you could shave months or even years off your car loan repayment term?
In this article, we will discuss your options to pay off your car loan faster and maximise savings in terms of cost and time.
In This Post:
Why Pay Off Your Car Loan Early?
If you can pay off your car loan early you will be debt-free and have additional cash in your pocket sooner!
But there is much more to this than the obvious benefits of having fewer expenses!
Save on the Cost of the Loan
A car loan will accumulate interest on the outstanding balance until it is repaid in full. This can take 5 to 7 years in most cases!
That can add up to a lot of extra money paid to the lender!
If you make additional contributions you can save yourself a lot of extra money – especially if you start early.
Let’s look at an example of the impact regular and one off repayments can make on the total cost of the loan.
Car Loan Scenario:
- $30,000 loan
- 9% interest
- 60 monthly repayments (5 year loan term)
- $622.75 monthly repayments
- $7,365 total interest payable
Pay an Extra $100 Each Month
If you can manage to pay an extra $100 a month (only $25 a week) then you’ll save $1,289 over the life of the loan.
You will also pay the loan in full 10 months early! That is 10 fewer monthly repayments to make.
- 50 monthly repayments
- $722.75 monthly repayments
- $6,076 total interest payable
One-Off Lump Sum Payment $1,000
Now let’s compare the impact a one-off additional repayment can make if paid early in the loan term.
Perhaps you got a bonus at work, or an expected tax refund!
An extra payment of $1,000 made six months after the loan was opened will save you $478 in future interest, and also see the loan paid off two months sooner.
A much smaller impact than the regular additional payments over time, but a big saving nonetheless.
- 58 monthly repayments
- $622.75 monthly repayments
- $6,887 total interest payable
Increase Your Credit Score
Your credit score is a reflection of your past behaviour in managing credit. Since Comprehensive Credit Reporting was introduced in Australia, a lender can see the status of your past loans at every stage.
If they were ever in arrears this would be visible. If they have been repaid this will also be visible!
Guess which one would appear more financially responsible to a future lender?
The longer the track record of uninterrupted positive repayments on credit-related products the more your credit score can increase.
A higher credit score can provide you with more options for cheaper interest rates next time you apply for a car loan.
Own Your Car Sooner
Have you ever tried to sell a car privately that was under finance? It is possible but creates a few extra steps and is a hassle.
Once you own your car fully you can do whatever you want with it, whenever you want. There will be no security registered that to potentially slow you down.
Be Debt-Free Sooner
In the example above, once you have repaid the loan in full you have $622 back in your pocket ($722 if you are paying extra!).
However, aside from the extra money you will have there is an unquantifiable peace of mind aspect that comes from not have the pressure of repayments coming out on payday.
If you can stay disciplined and make those extra repayments then you can pay off your car loan sooner!
Small Habits to Pay Your Car Loan Faster
Sticking with the $30k loan example, the first repayment you make will be 64% interest and only 36% to pay down the principal.
So anything you can do to pay extra money can make a big difference over time.
There are a number of small financial habits that will not impact your regular budgeting much at all – it just takes a bit of discipline!
Round Up Your Payments
Let’s look at just one more scenario. What if you rounded up your $622 repayments to $630?
The change is too small to notice, but is it going to make a difference?
Well, those extra few bucks will save you $112 in interest over the life of the loan. Money that is better in your pocket than the lender.
Bonus Payments
If you earn bonus payments in your work then chances are that your weekly budget doesn’t count on them.
Rather than heading straight to the pub on bonus day perhaps you could pour that money off your car loan.
Every time edging closer to that day of liberation when you have the balance repaid in full.
With an extra $622 in your pocket every month it will feel like bonus time every payday!
Tax Refunds
In the earlier example, we looked at the impact of a one-off payment of $1,000. Imagine if you did that every year when you received your tax refund?!
Yes, it can be tempting to splurge when that refund comes in. But if you can direct at least some of it to your car loan then those savings can add up in both money and time.
Refinancing to a Cheaper Loan
By refinancing to a cheaper loan, and retaining your current repayments, you will pay off your car loan faster.
This would only make sense if the loan is cheaper (after fees) or you would like to lower your repayments (the opposite of paying off your car loan faster – another topic entirely).
Five years is a long time and many people do not realise they could refinance their car loan with another lender and get a better deal.
Your circumstances in the eyes of a lender will change over time. If it has been more than 6 months it may be worth considering the following:
- Your credit score may have increased.
- The loan amount will be lower vs the value of the car (assuming you are making all your repayments on time!)
- You may have received a pay increase at work.
All of these factors could make you eligible for a cheaper loan than you are currently in.
Get in touch with our brokers below to review your current loan and whether there is a better deal for you out there.
Downsides of Early Car Loan Repayment
There are additional factors to consider if you want to repay your car loan early which you should discuss with your broker upfront.
Early Repayment Fees
Some lenders charge a penalty fee if you repay the loan ahead of schedule.
If you are in a position to repay your loan sooner you should weigh up any savings against the cost of any early repayment fees.
If you would like a fee-free option for early repayment then let our brokers know upfront and we can factor that into our criteria when finding the most suitable loan for you.
Opportunity Cost
Any savings from paying your loan faster should also be weighed against the alternative uses of that money.
If you can invest that money for a higher return (after tax) than you may be better off directing your money elsewhere.
However, for most people paying a loan down faster is the best option (and it is usually not even a close decision!).
Why Not Just Select a Shorter Loan Term?
You can select a shorter loan term and repay your loan in 3 years instead of 5, and if you can afford the repayments this may be the best option.
However, you are then locked in to these repayments for the life of the loan (unless you refinance).
Higher Minimum Repayments
Your required loan repayments will be much higher over a 3-year term.
For example, your minimum payment increases from $622 to $954 to repay the same $30k example discussed earlier.
This is fine if you are confident you can afford the payments.
Retain Cash Flow Flexibility
Some may prefer the 5-year term and the lower minimum repayments. They then have the flexibility to pay more when they want but have no obligation to do so.
This allows you some flexibility when unexpected or irregular expenses pop up – as they tend to do.
Conclusion
There is no magic bullet to pay off your car loan faster – you just have to make additional repayments whenever you can.
If your current car loan has a high interest rate then you can accelerate things by refinancing to a lower rate, and then making as many additional repayments as possible.
Get in touch with our expert team of car loan brokers below so we can talk you through your options today.
