Should I Pay Off My Car Loan Or Continue To Make Payments
Car loan helps you purchase your dream car. But, once you have gotten the car, the biggest issue is repaying the loan. You cannot afford to not pay back the loan as it would lead to your being repossessed by the lender. However, there are few tips and tricks to manage repayment of your car loan interest rate. Still, another key issue that remains is whether you should pay off your loan or should you continue with the car loan. Well, it depends on an individual case basis factoring upon numerous aspects that impact the decision. The aspects that impact the decision are:
Exceptions To The Rule
Of course, there are always unique situations that might warrant you paying off a car loan first. For example, say you only have $1,000 left on your car loan but carry $10,000 of credit card debt. Sometimes it’s psychologically helpful to eliminate a small debt completely before focusing on another.
However, consider how applying that $1000 you used to pay off the car loan might have boosted your credit scores and saved you money in the long run if you applied it to the credit card balance.
Another reason you might want to eliminate your auto loan is so you own your car outright, which can make it easier to sell or trade in your vehicle. You may also have access to lower auto insurance premiums because certain lenders can require costly comprehensive coverage during the duration of the loan.
But just remember, you could also be subject to prepayment penalties, which are baked into certain auto loans. Such penalties required the borrower to pay a fee, which is usually a percentage of the outstanding balance if you choose to pay off the loan before the loan period is up. So check the terms of your auto loan to avoid any additional costs.
A Car Is A Depreciating Asset
Before you decide whether or not to trade in your vehicle, you should understand that it is a depreciating asset which means that, unlike a house or a stock, it only decreases in value the longer you own it.
According to data from Carfax, a car depreciates about 10% of its value in the first month, 20% in the first year, and about 10% more of its value each year after that. That means your pristine $30,000 vehicle purchased in June will be worth about $27,000 in July, and $24,000 come next June.
If you have a loan on your vehicle and your car has decreased in value, you may find yourself in a situation in which you owe more on the car loan than the car is worth at any given point. If you put less than 20% down on your vehicle, this is very likely to happen to you within the first year. This will put you in a position of having negative equity, or owe more on your loan than you have in equity, which is equal to the value of your asset .
If you trade in your vehicle when you have negative equity, this will put you in a position where the collateral you used to secure your loanyour caris no longer in your possession. This will mean that you will owe the full remaining value of your loan as soon as you trade in your vehicle for a new one.
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Save Money On Interest
With each monthly payment you make, a portion goes to pay the interest that accrued since your last payment, and the rest goes toward paying down the principal balance of the loan. If you add money to your payment, 100 percent of that extra amount typically goes directly toward the principal, especially if you specify that intention when you make your payment. Not only does the practice reduce the balance on which interest is calculated but doing it regularly can have a compounding effect on your savings.
Use an auto loan early payoff calculator to find out how much you can save in your situation.
When Does Paying Off A Car Loan Early Make Sense
There are a few scenarios where it might make sense to focus your efforts on eliminating your auto loan debt. Here are some qualifiers that can help you decide whether it makes sense for your finances:
- You dont have higher-interest debt and want to free up the cash for other financial goals.
- The auto loan has a higher interest rate than what you could earn by investing.
- Youre hoping to buy a home soon and want to lower your DTI.
- You recently received a windfall and have enough cash in reserves for emergencies.
- Youre generally debt-averse, and its an important step for you in obtaining financial security.
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Advantages Of Paying Off Your Car
The most significant benefit of paying off your car is to save the money that you normally pay each month for your car payment. Having the extra cash flow can help you feel less financially burdened and allow you the opportunity to save money. The car loan’s interest rate is the amount of money that you are paying for the convenience of financing, so you can basically make a return on your investment that is equal to your current interest rate by paying off the car. You will also and potentially increase your credit score.
Should I Pay Off My Credit Card Or Car Loan First
If you have more than one type of debt, deciding where to focus your repayment efforts can be tricky.
According to data from Experian, more than 84% of new cars purchased in 2020 required an auto loan, while buyers financed nearly 39% of used vehicle purchases. That means there are a lot of car loans out there, which combined with other forms of debt, like mortgages and credit card balances owners will be paying off for years to come.
Its no wonder, then, that many drivers look for ways to get out of debt and pay down that loan balance even sooner than scheduled. But where to focus those get-out-of-debt efforts, and should you pay off credit cards or your car loan first?
2021 Auto Refinance Rates
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Notify Your Car Insurance Company
Notify your car insurance company when youve paid off your loan so you can remove the lien holder from your policy. You dont need to wait until you have the title in your hand to make the call.
This step is important because if your financed vehicle were totaled in a wreck, the insurance payment would go to the lender. Once youve paid off the car and own it outright, the payment goes to you.
Sell Trade Or Try Transit
You might want to ask yourself an unexpected question: Do you really need a car? More narrowly, do you really need that specific car that youre driving?
If you live in a city with good local transit, you can save a lot of money not only on car payments, but gas, insurance and upkeep. Or, perhaps COVID has you working from home rather than commuting daily. If youre in a family with more than one car, maybe you dont need them all.
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Turning A Liability Into An Asset
When you owe money on a car loan, your car is more of a liability than anything. However, once you pay off the vehicle and the lender releases the title to you, the vehicle is now an asset.
You can sell the vehicle and keep 100% of the proceeds or use it as a trade-in on a new car if needed. You can even borrow against its value if you ever hit a tough spot financially.
How To Pay Your Car Loan Off Early
Before completely paying off your car loan, review your options to see which one makes the most sense for your financial situation, like:
- Pay off the full amount. In order to pay off the entire remaining balance, it may require a few hundred or thousands of dollars to be paid at once, depending on how much is left on your car loan balance.
- Pay a partial payment. If you got a bonus at work or maybe sold something for a hefty chunk of change, you can use that money to make a large partial payment on your car loan.
- Boost monthly payments. If you got a raise at work or a new side hustle, you can increase your monthly payments in increments. This will reduce the number of monthly payments you need to make to repay your car.
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Freeing Up Money To Pay Your Other Debts
Forget the interest calculations for a second
What if paying off your auto loan or mortgage early gave you the ability to do something else worthwhile with your money?
What do I mean by this?
Im talking about cash flow. What if our goal should be to free up as much money in our monthly budget as possible, so that we can then use it to tackle our other debts?
This strategy is popularly known as the debt snowball method. The process is always the same:
As you can see, this technique creates a cascading effect where your budget stays the same, but your payments compound upon one another until your debts are all gone.
So what does this mean for your auto loan vs mortgage dilemma?
Without knowing your purchases, odds are very good that the amount of money you still owe on your auto loan is less than your mortgage balance. Therefore, with this strategy, you would:
Prequalify With At Least Three Personal Loan Lenders
Most lenders will let you prequalify for a personal loan, which allows you to compare potential APRs based on your financial information. When you prequalify, a lender will do a soft credit inquiry, which wont affect your credit score. Once you receive quotes from at least three lenders, use them to shop for the lowest APR for your financial situation.
Tip:
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When Paying For A Car With Cash Might Not Make Sense
On the other hand, there are some arguments against using your own funds to buy a car. For example:
- You might deplete savings that are necessary for current expenses or future emergencies.
- You may not have enough to buy a safe and reliable car.
- If you need to start or reestablish a credit history, paying with cash won’t help, but a loan that you properly manage will.
If you’re thinking of waiting and saving up cash because you think less-than-perfect credit won’t qualify you for a loan, financing still may be an option. Special financing deals are sometimes available to people with lower credit scores, and you may be able to finance a car at a decent rate so you can go to work or school, or use it for your family after all.
Should I Pay Off My Car Loan Early Or My Mortgage
May 6, 2018 by MMDSome of the links included in this article are from our advertisers. Please read our Disclosure for more info.
Question: If Ive got a little extra money that Id like to use responsibly to pay off one of my debts, which is the better one to put it towards: Should I pay off my car loan early or my mortgage?
Ahhh the old which of my debts do I pay down first debate
We tend to carry a lot of them in our society. According to a 2017 report from GoBankingRates, the top three forms of debt for most people are their mortgage , credit cards , and auto loans .
Usually questions like this are a no-brainer. Simply look to your loans with the highest interest rate and pay those off first. That means tackling your high-interest debt like credit cards and student loans.
But what about our auto loans and mortgages? When it comes to debts like these, the differences can be a bit more subtle. The interest rates are often lower, and the payments are more manageable .
All in all, debt is still debt! And the sooner you can pay it off, the quicker you can crawl out from underneath the mountain of interest that is building up on top of you.
But for these two types of loans, is that all there is to it? Are there are other implications to paying off your mortgage or car loan that can make one option more attractive than the other?
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Why Paying Off Your Car Is A Key To Wealth
I know people think Im crazy when I say you should pay off your car. Living without a car payment is definitely not the norm in our culture. Most people have bought into the lie that youll always have a car payment. If that is your mindsetif the two cars in your driveway are stealing $1,100 in car payments from your hard-earned money every monthitll be hard for you to get ahead of living paycheck to paycheck.
The truth is, few things will keep you as broke over the course of your life as car payments. The routine of making car payments every single month of your entire adult life is one of the worst financial habits out there.
If you want to live the life youve been dreaming about, without money stress, youve got to break the car payment habit and replace it with a habit of saving.
If you can make that mental shift and pay off your car, you can free up literally millions of dollars in potential retirement income. This is a big, big deal.
So, what would happen if you paid off your car? What would your life look like five, 10, or 20 years from now? Do you love your car so much that youre willing to sacrifice your future for it?
Paying off your car will be one of the best financial decisions you can possibly make. Then, save up and pay cash for the next one. Trust me, feeling good about the future is better than that new car smell.
About the author
Rachel Cruze
Using Cash For Investments Vs Paying Down Debt In Retirement
By on April 24, 2019
Should Karen, 65, pay off her car loan or invest her $23,000?
Q. I just turned 65 years of age and am feeling the pinch of some of the financial mistakes I have made. Last year I bought myself a new car as a treat from the money I received from selling my home, and this year reality hit me. My car loan is at 0% interest, and I owe $ 23,000. I have enough to pay it off but initially decided to leave my money in investments. My thought was that this plan would help earn some investment income over the six years of the loan. However, now that I am living off of Canada Pension Plan and Old Age Security benefits each month, I feel the pinch of the payments. So my question is? Should I pay off the car, or continue the monthly payments? Thanks. Karen
A. A reliable vehicle is necessity for many peopleand a brand-new car is enticing, indeed.
You dont mention what return you are getting on your investments, but one general rule of thumb is that you should use your money where it earns more than it saves you. So for instance, if the money you have tucked away earns more than 0%, then the investments are a better place for your money than paying off the 0% loan.
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Ways To Cut The Cost Of Your Car Loan
Pamela Rodriguez is a Certified Financial Planner®, Series 7 and 66 license holder, with 10 years of experience in Financial Planning and Retirement Planning. She is the founder and CEO of Fulfilled Finances LLC, the Social Security Presenter for AARP, and the Treasurer for the Financial Planning Association of NorCal.
With financial headwinds like rising gas prices, a slowly-recovering economy and continued job scarcity, reducing costs in every corner of our financial lives have become a necessity. Unfortunately, our cars aren’t concerned with our economic troubles. When they break down for the last time and we are forced to buy a new one, finding the best deal on financing becomes a necessity.
Smart Tips To Pay Off Your Car Loan Faster
After fulfilling your dream of buying your favourite car, you begin to start making payments of EMIs towards the loan. A couple of years later, you could find the loan highly unbearable, making you search for an individual who could take over your outstanding balance. But to your utter dismay, you may not find anyone. You could then visit various car websites to find a prospective buyer for your vehicle. Then again, you may fail to find any interested buyer, thus raising your concerns. But you need not to worry as there are some tips that can help you pay off your car loan quickly.
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