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Is it possible to pay a car credit off before expiry?

5 min.

Once financial circumstances enable to repay a car loan prematurely, a customer is able to save significant money on interest. There are several factors to consider before embarking on an early repayment.

Is it possible to pay a car credit off before expiry?

It depends on a lender but usually clients are allowed to prepay their car credits and thus, making a vehicle overall value lower as there is less time for increasing interest on the loan.

Attention! Some auto loans have pre-calculated interest which means paying the same percentage regardless if a customer repays the loan prior to maturity or within the original term.

Pre-calculated interest loans guarantee that lenders receive full interest payments, no matter how soon the loan is being repaid. In such cases, early redeeming only helps clear this debt more quickly but will not lower the car's value.

6 strategies for early car loan repayment

  • Refinance the loan. In case of being in a better financial position than when you bought the car and having a good credit rating it is worth refinancing the loan which will cause a shorter term at a higher rate and help cover the debt faster.
  • Perform additional payments. If possible, it's better to perform additional payments. For example, this may help save funds on interest if you have two additional per annum charges.
  • Proceed lump payments. You should try to make several large payments during a year provided you receive extra money in the form of a tax refund, bonus or pay rise.
  • Review car insurance options. You can get additional savings by checking other auto insurance options especially if you are an experienced driver. In this case you can just use the money saved to defray a car loan.
  • Sell unnecessary belongings. Making a list of personal items which haven't been used for a long time and checking your real need in them can appear to be a really sensible idea. To have cash can be much better rather than to store unnecessary things.
  • Don't miss payments. Even if you have no interest arrears right now and don't have to make a payment, never miss it anyway. Doing it just once will delay the loan redeeming and in the long run may cost more money.

The ways early payments work

Before taking a car loan you should ask the lender what penalties or commissions are charged for early repayment. Frequently cars are used as collateral and have a fixed rate of interest. Thus, lenders may impose restrictions or commissions on prescheduled paying off because otherwise, they will lose money on interest payments.

There are two different approaches to additional payments or the loan early redeeming:

  • A floating rate loan paying. Lenders generally set fewer restrictions on floating rate car loans. As they do not usually lose much money due to redeeming of variable rate loans (as opposed to fixed ones) you probably will not have to worry about prepayment.
  • A fixed rate credit repayment. An entire loan pay involves redemption of a loan's balance because of the lender over the period of a fixed rate. In this context, you will probably cover administration and termination charges which the lender claims for covering the lost interest.

Additional information about car credit payments

The way how you handle with the loan will affect its fees, that's why they should be studied carefully prior to applying.

Interest rate calculating

Many creditors pre-calculate interest for a car credit which means the percentage you pay until the end of the loan term is included in payments. Regardless to additional payments performing, they will likely be charged to the interest rather than principal, so the actual loan amount will not be reduced.

Customers are provided with an option to make weekly, bimonthly or monthly payments which can help plan their budget.

Important! In case of paying a floating percentage rate the terms of recalculating interest according to the principal rate are worth been specified.

Payment options flexibility

You should check the possibility of performing additional payments without penalties and whether their number is limited. As with the pre-calculated interest, you should be aware of the way these additional charges are applied.

Proceeding payments

Most people prefer setting up automatic withdrawals from their bank accounts while a number of lenders require it as well. Other options for repaying the loan may be offered, for example, through an online account with your lender or paying by cheque. However, there is an additional charge which can make it difficult to reduce your balance due.

The idea of a prepayment penalty

Attention! A loan agreement typically contains much fine printed text which sets out all the smallest details about your obligations.

That is why it's important to read the agreement carefully before signing. Please note that prepayment penalties among contract details are worth double checking.

The pre-scheduled redeem penalty is a finance fee you will have to pay in case of repaying the loan in full before maturity. Lenders normally make money on interest so in case the loan is paid off early, that profit will be reduced. To recover the loss they may charge a prepayment penalty.

The rate of such a penalty, if any, will be specified in the loan agreement. At the same time, the fines are usually the smaller, the less your debt is and the longer you have a loan. You'd better clarify if the contract contains this type of penalty clause and the amount you will be charged in case of repaying the loan before its original maturity date.

The best time for a loan pre-scheduled paying off

There are many situations when early loan repayment can be beneficial, for example:

    • The prepayment penalty is less than the interest you would pay
    • You can afford this penalty and not be in debt
    • Your debt-to-income ratio should be reduced
    • You want to save on interest
    • You want to improve your credit rating

How to save money by premature loan redeem

There are literally dozens of ways to accumulate money for early loan repayment. Below are just a few suggestions:

    • Cut your costs
    • Save money either for covering a certain percentage or putting in a savings account
    • Automate your savings
    • Pay off your higher rate loans first to free up more money
    • Use your credit cards wisely
    • Move bank accounts to take advantage of benefits and earn more interest
    • Negotiate rates of interest with the credit card issuer
    • Take a shopping list with you when shopping and stick to it
    • Sell items that you haven't used for at least 6 months
    • Reduce power consumption in your home
    • Cancel your membership at little used clubs

The article was useful


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