Why it is wise to prepay a car loan
Isaac Diaz, who turned 40 in June, has started planning to pay off his mortgage.
âNow I’m focusing on paying off my car,â says Diaz. “I am very happy because I am only a few months away from paying for this.”
Diaz owns the 2013 Acura TSX and refinanced it for $ 15,249 in 2019 after buying the one he was using a few years ago. At the end of April, there was about $ 4,999 on her loan. But over the past few months, Diaz has managed to cut by about $ 2,000, and as of June 24, his loan balance was only $ 2,999.
His car typically pays $ 371 per month, but recently Diaz has paid an extra around $ 630 per month to bring it to $ 1,000 so he can get rid of his debt faster.
âI pay more for the car loan, but it will be rewarded because the car will be mine,â says Diaz. After his car is paid off, Diaz plans to start using the money he spent there on his student debt. She has about $ 6,000 left on her student loan.
âIt’s very difficult to pay extra right now because I can do more with this money, but that won’t prepare me for success later,â says Diaz.
Why repaying a car loan is a good approach
Mortgage prepayments can be a smart move, experts say, if you can afford it. âPaying off a loan is always a good idea, and buying a car is probably one of the biggest loans people take outside of buying a home, so that’s a good point. starting, âsaid automotive research firm Edmonds. ..
Beyond peace of mind, there are tangible benefits to paying off your mortgage, says Montoya. You could save interest especially if you have a 60 month, 72 month or even 84 month mortgage.
Suppose you have a loan of $ 30,000 with a repayment period of 6 years and an interest rate of 5%. In the end, you will pay a total of approximately $ 35,000 (initial principal of $ 30,000 and interest of just under $ 5,000). However, if you prepay the loan, you can reduce some of the interest.
Mortgage payments can also put pressure on a month’s budget, according to Montoya. After your car is paid off, you now have extra money that you can spend on paying off other debt, increasing your savings, or spending money.
But before loan repayment can begin sooner, consumers need to make sure the lender allows it, Montoya says. âMake sure you know what the fees will be if you prepay the loan,â he says. This is because some lenders charge a prepaid penalty.
Another pitfall to be avoided, according to Montoya, is âthe temptation to dive into buying another carâ. He says many see loan repayments as a time to reset and buy another car. But in doing so, you lose the ability to own a car without paying for it.
If paying off your car loan isn’t the right decision, you may want to consider refinancing. âIf you have high interest rates, credit is stable or has improved since you first took out the loan, it’s worth considering refinancing,â says Montoya.
Currently, interest rates are “quite low now,” he added. According to Edmans, the average interest rate on new cars is currently around 4.5%, with an average term of around 70 months. The interest rate on used cars is slightly higher, at 7.7%, with an average loan term of 69 months.
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