Paying off your car loan title before the end of your loan term is an enticing consideration if you want to pay off your debt faster. Making that decision shouldn’t be made hastily though. It hinges on factors like your current interest rate, monthly payments, and overall financial situation.
For many, it may be worth it. However, taking the time to do your research and due diligence regarding your car loan agreement and financial suitability is absolutely necessary.
When to Consider Paying off Your Auto Loan Early
Before further contemplating paying off your car title loan, it’s important to consider when is the most appropriate and ideal time to do so. Just like when you first applied for a car title loan, this is a significant financial decision requiring careful thought.
Some good indicators that you’re in a good position to pay off your loan early can include:
You’re in a Good Financial Position
If you’re in a financial position where you can afford to pay off your car title loan and don’t have any other major financial obligations, paying off your car loan makes sense. Even though it would initially be a financial hit, it will help free up money in your budget to allocate towards other things in the long run.
Your Budget Has Enough Room to Pay Off Your Car Loan
You’ll want to take a good look at your budget and factor in how much you’re monthly income and other reoccurring expenses are. Credit card debt and personal loans often have higher interest rates than your car loan. You may want to direct extra financial resources there if this is the case.
You’re Saving for a Large Purchase
Major financial decisions like purchasing a home can benefit individuals who lower their debt-to-income (DTI) ratio. Lenders consider your DTI ratio when determining whether to lend you money and at what interest rate. By paying off your car loan early, you boost the cash you have on hand and lower your DTI.
It’s important to remember that not everyone has the same flexibility or financial power to pay off a car title loan early. If you don’t have the latitude to do so, other alternatives are available. Options like refinancing your loan can give you the chance to lower your interest rate and reduce the amount of interest you pay over the term of the loan.
It’s important to choose a financial path that fits your unique situation and benefits you best.
Downsides to Paying Car Loan Off Early
While there are some benefits that are associated with paying off your car loan early, there can also be some pitfalls that aren’t commonly discussed.
Prepayment Penalties
Depending on your loan contract with your car loan provider, some contracts have prepayment penalties. This means that if you pay your loan off before the full term, you could face a penalty fee.
It’s important to read over your car loan contract or contact your loan provider to see if this clause is incorporated into your contract. If you do have this clause in your loan agreement, you can compare the cost of the fee to the overall savings of paying your loan off. This is a good way to see if the fee is reasonable and worth it.
Your Money Might Be Better Used Elsewhere
Paying off your car loan can feel very enticing at a glimpse. But it’s just as important to consider how paying off one debt will affect your other monthly payments and debts that may be costing you more. You’ll want to compare the interest rates of all your outstanding debts to see which has the most interest versus the lowest. By doing this, you can save more on the interest you owe by choosing to prioritize higher-interest debts.
Credit Score Drop
Any time you pay off a debt, it lowers your total credit mix and open accounts, which can cause a temporary dip in your credit score. Typically, this dip rebounds within a few months though.
How to Pay Your Car Loan Off Early
Make a Large Lump-Sum Payment
If you have come into some extra money, whether from a tax return, work bonuses, a profitable sale, or another form of sizable cash. It’s worthwhile to see if paying off your title loan in its entirety is beneficial. By paying your loan off in full prevents interest from accruing and goes toward your principal balance.
Round Up Your Automobile Payments
If paying off your auto loan in full is not an option, you can also make additional payments in order to pay it off faster. Rounding up your payments to the nearest hundred or whole number can decrease the amount of interest and increase the amount that goes toward the principal of the loan.
For example, if your monthly loan payment is $225, rounding up to $250 or even $300 will help pay your auto loan off faster.
Ensure You Pay Every Month Even If You’re Ahead
Always make sure you make your monthly payment, even if you’re ahead of your payment schedule. This helps prevent interest from accumulating, and you’ll pay less overall interest. As a general rule, your auto loan can be paid off early if you continue making payments even when they are necessary.
Find the Best Car Title Loan Provider in Edmonton
Car title loans offer several enticing benefits, but it’s crucial to approach them with a clear comprehension of their terms and conditions. By going with trusted lenders like Mr. GOODLoans, you can have all the benefits of car title loans while being well-informed and secure in your financial choices.
To learn more about our car title loans in Edmonton, contact us at 403-986-8781 or complete an online application today!
