If you have a car loan (or you’re thinking of taking one out), it is sometimes possible to save money by paying off your car finance early. Read on to find out everything you need to know, including answers to FAQs.
How much can you save by repaying your car loan early?
This depends on a range of factors, including:
- how much you owe,
- the term of your loan,
- the interest rate,
- and how early you pay it off.
Let’s look at a couple of examples:
Example 1
Let’s imagine you are paying off a 5-year, $20,000 car loan at an interest rate of 10%. Your monthly repayment would be $425 per month.
Instead of paying $425 per month, you decide to pay $106 per week instead (your monthly figure roughly divided by four). If you did, you would pay off your loan 5 months earlier and save yourself $626 in interest, as the table below shows.
|
Loan Amount |
Interest Rate |
Repayment |
Loan Term |
Total Amount Paid |
|
$20,000 |
10% |
$425 per month |
5 years |
$25,495 |
|
$20,000 |
10% |
$106 per week |
4 years and 7 months |
$24,869 (a saving of $626) |
Example 2
The more you borrow, the more you can save by paying your car loan off earlier. Let’s see how the calculations work if you pay off a $30,000 car loan earlier by using the same strategy as Example 1.
|
Loan Amount |
Comparison Interest Rate |
Repayment |
Loan Term |
Total Amount Paid |
|
$30,000 |
10% |
$637 per month |
5 years |
$38,252 |
|
$30,000 |
10% |
$159 per week |
4 years and 7 months |
$37,303 (a saving of $949) |
Are there any early repayment fees?
This depends on your lender. Some lenders charge early repayment fees, while others don’t. If you haven’t taken out car financing yet, and you’d like the freedom to repay the loan early, it may be worth finding a lender with both a low interest rate and no early repayment fees.
You can compare the terms and conditions of car loans from different lenders here. When comparing interest rates, make sure you look at the various fees too. There’s no point finding a loan with the lowest interest rate if you’ll end up paying high fees!
Strategies for paying your car loan off early
The two examples above used the strategy of making weekly rather than monthly repayments. It can be easily achieved by dividing your monthly repayment amount into four and paying that amount weekly instead. Draw up a budget and arrange a direct debit from your bank account to help you achieve this.
Another strategy is to make an additional payment (or more) on your car loan whenever you can. For example, if you get a tax refund or a bonus at work. The more additional payments you make, the more interest you will save (and the sooner you will pay off your loan and own your car).
Paying off a car loan early may be able to save you a lot of money. However, it’s important to find a loan that suits your individual needs and budget. Be sure to compare a range of car loans to find the one with all the features you’re looking for.