Choose a country
United States
Choose a city
Choose a city
Select language
English
Select country
Choose a country
United States
Canada
España
México
United States
Việt nam
Казахстан
Россия
Україна
Select city
Choose a city
Choose a city
Washington, D.C.

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

18.05.2021
688
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

Cookies

We use cookies to save login details and improve the quality of the Service by identifying the information you are most interested in, tracking trends, measuring the effectiveness of advertisements, or storing information that you might want to receive on a regular basis. If you choose to disable cookies, many of the free features of the Service will not function properly.

Manage settings

Strictly necessary cookies

Strictly necessary cookies are the only cookies that do not require the user's consent. They can be set before the cookie banner appears. This is a type of cookies that allows online shops to store items in your cart while online shopping, and is an example of strictly necessary cookies.

Functional cookies

Functional cookies allow websites to save the user's preferences and the choices made on the website including the user's name, area and language. These cookies can save your preferences in order to improve the user experience on the website.

Performance cookies

Performance cookies are cookies used specifically to collect data about the way visitors use the website, which pages of the website they visit most often, or whether they receive error messages on the website. These cookies only track the performance of the site when the user interacts with it. These cookies do not collect identifying information about visitors which means that all the data collected is anonymous and is used only to improve the functionality of the website.

Targeting cookies

This website and our trusted partners use third party cookies. They are used to display personalized advertisements on this and other websites. The selection of ads is based on the search history and considers, among other things, the housing options and prices that you have viewed. These cookies are also used to integrate social networks with our website allowing you to “Like” pages or certain product descriptions on social networks.
cookie
Finanso™ uses cookies to personalize services and improve the user experience of the website. If you do not want to use cookies, please change your browser settings.