A car loan is a great way to purchase a vehicle when you don’t have all the money to pay for the car upfront. However, if you are getting ahead on your savings and potentially want to pay off your car ahead of time, there are a few things to consider.
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Advantages
Save money on interest
The sooner you’re able to pay off your car loan, the less interest you will be paying on your loan. The extra interest can be put towards savings or other investments.
Pay off other debts
If you have a number of debts to your name, it can be a good idea to slowly start paying them down. If you can pay down a larger debt like a car loan, then the money you’re saving on interest could be put towards your other debts. Another option is to consolidate your debts into one loan with a lower interest rate.
You’ll own your car outright
When you take out a car loan, the loan itself is normally secured by the car. That means the lender still has a claim on the vehicle in the event that you don’t make the repayments. If you pay out the loan, you will own the car outright.
Disadvantages
Early repayment costs
The biggest downside to early repayments is that you could be required to pay some additional costs such as break and exit fees. These are often to do with the type of loan, especially if you have a fixed interest rate. All lenders and loans will have different policies so it’s worth examining your current loan documents to determine if, how much and what the possible costs could be.
Reduced savings
Just because you can pay down your loan doesn’t mean that it’s in your best interest to do so. Depending on what you need those additional funds for, they could be used elsewhere. For example, if you’re saving for a home and need a deposit, the money might be better off put towards that instead of paying off your car. Everyone’s personal circumstances will be a little bit different.
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