When it comes to car loans, paying more can be a wise financial decision. If you have the finances, there are various advantages to making additional payments. In this article, we look at the benefits and drawbacks of making prepayments on your car loan.
Benefits of prepaying your car loan
- Lower interest payments:
Paying extra on a car loan might result in significant interest savings. The amount of interest that accrues on your loan is determined by the principal outstanding, the interest rate, and the duration. By paying extra, both the principal and interest are reduced, resulting in lower overall interest payments. - Shorter loan term:
Make extra payments on your car loan to shorten its tenure. This will help you get out of debt faster than if you only made the required payments. Furthermore, it implies that you will be able to buy your car sooner and enjoy it without the burden of debt. - Better equity:
Paying extra on your car loan might boost your equity. This is because the extra payments you make are applied straight to the principal amount. As a result, you receive a higher portion of the car's true value, which might be useful when trading in or selling.
How to make prepayments
- Check the car loan terms:
You can choose to make a full prepayment or a partial prepayment on car loans. Understand the lender's prepayment clauses, penalty charges, and payment options before making any extra payments on your loan. Check with your lender to learn about the prepayment fees and the resulting savings. - Budgeting:
Adding extra payments to a car loan takes careful planning and budgeting. Choose a specific amount that you can afford to pay each month or quarter, or use your spare funds whenever possible. Offering an additional payment on the due date is an effective strategy to lower the interest component that is owed during the loan's tenure.
Impact of making extra payments on car loans
Increasing your car loan payments may not necessarily improve your credit score. Having a healthy mix of credit helps enhance your CIBIL Score. If you have other debts with higher interest rates, focusing on them rather than your car loan will boost your credit score. Furthermore, prepaying too much can deplete your funds and lead to increased debt utilisation.
To summarise, paying extra on your car loan can save you money in the long run by shortening your loan term and increasing your equity in the car. However, before making any further payments, make sure you understand the penalty conditions and costs to ensure you obtain the most financial benefit. Always consider your budget and credit score while making extra payments, and you will reap the benefits of being debt-free.
