Paying off your car loans faster can be alluring as a big burden is removed. But practically, there are a lot of challenges to face while finishing off a loan. We ought to ask ourselves a variety of questions and hunt for appropriate answers. This blog aims to answer those doubtful questions that pop into your head while considering a quicker loan repayment.
When to consider paying a loan early?
A swifter money repayment is a huge financial decision and needs to be given utmost thought and clarity. Pay it off if you can afford it. If you don't have any other significant, more expensive financial responsibilities, it makes sense to pay off your car loan. You'll have more money in your budget to use for other purposes. But if you don't have the money, you might want to consider your alternative possibilities. You can also choose this option if you don’t have other loans or EMIs pending. Finally, if you have another big investment coming up such as buying a house, car loans can be paid off faster as they’re depreciable and needn’t be given a significant priority.
Not everyone has the resources necessary to prepay a car loan. You might wish to consider other solutions if you lack the necessary finances. You have the opportunity to minimise your interest rate and the total amount of interest paid throughout the loan by refinancing your auto loan. But, it could also increase your monthly expenses, therefore it's critical to pick a financial course that suits your needs.
Why should we consider paying off a loan early?
If we pay the loan off faster, there are a lot of advantages that can be beneficial. First off, it improves our CIBIL score. CIBIL scores are crucial for availing of a loan in the future. Next comes the interest rate we will be paying. Apart from the principal, interest rates are the extra amount we pay to the lender. So, the earlier we pay, more the money we save. Lastly, we own the car sooner without having to worry about the money we owe. Even though you drive and maintain it, the car still belongs to someone else so long as there is a loan on it.
Why shouldn’t we pay loans fast?
While repayment of the money we owe sounds like a good plan, there may be a few difficulties in doing so. The loan term we opt for can attract a penalty if we pay the amount sooner as there is a fixed period. The lenders obviously do not want us to pay off the money sooner as they may face a loss and to avoid that they may slap an additional fee. The other issue is that we may have to pay a lump sum at one stretch and we may not have money left for other purposes. In a nutshell, planning becomes important.
Tips to pay off loans faster
After we have weighed out the pros and cons of the decision and we decide to pay out loans sooner, there are a few utilisable tips below:
- Even before opting for a loan, choose a car that is affordable and does not drain all your cash. Do not go for cars beyond your budget. Faster we pay, the lesser the interest amount we have to pay.
- Choose a loan plan that fits into your plan perfectly and enables you to finish the loan quickly.
- Increasing the principal will bring your interest component down, which in turn reduces what you owe as a whole. This means, having a bigger down payment and the period of interest will go down eventually.
- Your loan corpus will increase if you temporarily cut back on unnecessary monthly expenses. If you apply the money you've saved directly to your loan, it will affect your loan account. For instance, limiting one or two activities, such as eating out, impulsive buying, etc.
- Round off your payment to the nearest 100s or 1000s when paying back the money. Assume you borrow 3L with an 8.5% interest rate. So, you’re required to pay 25,500. Instead, pay 30,000 and save a lump sum.
- Make at least one large payment during the loan term and also try paying twice a month. As hard as it sounds, on the whole, the loan expires faster and our pockets can be full sooner.
Financing your car can be quite a hectic task. There is a lot of pre-planning involved as well as time consumption. This blog can clarify a few thoughts that often occur while making such decisions. Happy Learning!