If you have a car loan (or you’re thinking of taking one out to buy a new or second hand car), it’s important to know how to pay it off faster if you want to. Read on to find out how you can do that and the benefits of paying your car loan off early.
Can you pay off a car loan early?
Yes, you can pay a car loan off early, but some lenders may charge you an early repayment fee. However, not all lenders do.
If you haven’t already taken out your car loan and paying it off early will be a goal, you should look for a lender who doesn’t charge early repayment fees.
If you already have a car loan, you should find out if you have any early repayments fees. If you have, it might be worth exploring the option of refinancing with a different lender. But that may involve fees as well, so it’s best to contact a finance broker for advice on what to do.
Finance brokers like our expert team at National Loans deal with multiple lenders but they work on behalf of car buyers.
How to pay off a car loan faster
There are a variety of way you can pay off a car loan faster:
- Make one or more voluntary lump sum repayments.
This obviously reduces the amount you owe, and it also lowers the amount of interest you will pay.
Every extra amount you can repay (no matter how small) will help, but obviously the higher the amounts, the better. If you get a lump sum (for example a tax refund or a work bonus, put all or as much of it as you can into your car loan as a voluntary extra payment).
- Increase your regular repayment amount.
If you get a pay rise or you can otherwise afford to increase your regular repayments, thwen you will pay off your loan faster and save on interest costs.
- Change your monthly repayments to weekly.
The ‘magic’ way to do this is to divide your monthly repayments by four and pay that amount weekly instead. For example, if your current monthly repayments are $700, arrange to pay $175 per week instead (i.e. $700 divided by 4).Dividing your monthly repayment by 4 allows you to make extra repayments without even realising or noticing it. Using the payment amounts in the example above:
- 12 x the monthly repayment of $700 = $8,400 per year, but
- 52 x the weekly repayment of $175 = $9,100.
You pay an extra $700 doing weekly repayments in the example above because there are are just over 4 weeks in every month of the year. All those extra days add up over the course of a year, and dividing your monthly repayment by 4 allows you to make an extra monthly repayment.
You can use our car loan calculator to help you see how much difference that can make to different loan and repayment amounts over different terms at different interest rates.
- Take out (or refinance) a shorter car loan term.
A shorter loan term will obviously enable you to pay off your car loan faster. Car loan terms in Australia typically range from 1 to 7 years. However, before you take out (or refinance to) a shorter car loan term, you need to understand that your regular repayments will be higher than they will if you have a longer loan term. You therefore need to be able to afford the higher repayment amount.
- Take out (or refinance) a car loan that includes a balloon payment.
A balloon payment is a higher single repayment amount at the end of your car loan term. It enables you to take out a shorter loan term and it also lowers your reguular repayments. However, it’s important that you will be able to afford to make the balloon repayment amount when it falls due.
Should I pay off my car loan early?
This depends on your loan terms and conditions, as well as your individual financial circumstances and goals.
For example, if you will be charged fees for paying out your car loan early, then you need to weigh up whether the interest savings will outweigh them.
You also need to make sure that you can afford to repay your car loan early, either via increasing the amount or frequency of your repayments, or by paying a lump sum. You may need that money for other purposes.
Will paying off my car loan early improve my credit score?
Yes, paying off your car loan early should improve your credit score because it will lower your overall debt level. Improving your credit score will make it easier for you to get approved for future finance.