When it comes to paying off an auto loan early, there are two sides to look at: the benefits and the downsides.
Hacking Your Auto Loan
In most cases, the money saving benefits of an early loan payoff far outweigh any potential negative effects. Especially if a borrower is dealing with bad credit, knowing the tricks that save hundreds or even thousands of dollars in interest charges is a big plus.
The hack for an early loan payoff is fairly simple. There are no set rules on how quickly the loan must be paid off or how much you need to increase your monthly payment if you want to reach this goal. The trick is to pay whatever extra you can, as often as you can. Simple as that. But, if you prefer to do things on a schedule, you can always round up your monthly payments – simply paying an extra $50.00 per month can save you hundreds.
Another option is to split your monthly payment in half and pay bi-weekly. Because of the 52 weeks in a year, this breaks down to 26 bi-weekly payments, or 13 full monthly payments. This gives you an extra payment each year.
There really isn’t a downside to paying off an auto loan early, unless there are pre-payment penalties built into your loan. If there are, it’ll be up to you whether the benefits of making early payments outweigh the drawbacks. There are a few types of penalties to watch out for if you plan on making payments ahead of schedule, so read your auto loan contract carefully to make sure none of these apply to you.
The easiest way to spot this is anything that refers to a pre-payment penalty. If this language is in your loan contract, you’ll be paying a certain percentage of the outstanding loan balance. Another thing to watch out for is a loan that isn’t a simple interest loan. In these cases, lenders will use the “rule of 78s” which calculates the loan interest up front for each month of the loan (it’s also pre-loaded so you pay more in interest charges early in the loan) and, because of this, you can’t save in interest charges even if you make your monthly payments early. These loans total principal and interest upfront so a borrower knows they’re agreeing to pay the interest amount, regardless.
Let Us Be Your Guide
No matter your auto loan situation, we here at Drivers Lane want to help you find the right lender for your next vehicle. We work with an expansive network of special finance dealers that have lenders who can assist people in many challenging credit situations. Let us help you find a local dealer for your situation. Simply fill out our online auto loan request form to get started!