Can I pay out my car loan early; and should I?
Paying off your car loan early might sound like a smart financial move, but is it always the right decision? While it’s certainly possible to get out of your loan ahead of schedule, there are a few factors you’ll want to weigh up first, including the type of loan you have, any break fees, and your overall financial goals. Here’s what you need to know.
In most cases, car loans in Australia can be paid out before the end of the loan term. However, depending on your loan type and lender, early repayment fees may apply. These can include break costs for fixed loans, discharge fees, or administration charges.
If you’re unsure, check the loan’s terms and conditions or speak to your lender directly. You’ll want to understand the total payout figure, which includes the remaining balance, any fees, and any outstanding balloon payments if applicable.
There are two common approaches to clearing your car finance ahead of time:
- Extra repayments: Contribute more than the minimum monthly amount, or pay fortnightly instead of monthly to reduce the interest burden and chip away at the principal faster.
- Lump sum repayment: Pay off the remaining balance in full when you have the funds available. This clears the debt in one go, though make sure it aligns with your cash flow and any applicable fees.
PROS OF PAYING OFF YOUR CAR LOAN EARLY
Save on Interest
Interest on car loans is usually calculated daily on the outstanding balance. The sooner you reduce that balance, the less interest you’ll pay, thus saving you money over the life of the loan.
Improved Cash Flow
Once the loan is cleared, that monthly repayment disappears from your budget, freeing up money for savings, investments, or other goals.
Avoid Negative Equity
Because cars depreciate quickly, there’s a risk your loan could exceed the vehicle’s value, known as negative equity. Paying down or clearing your loan faster reduces that risk.
Full Ownership
Until your loan is repaid in full, the lender likely holds an interest in your vehicle. Paying it out early gives you full ownership sooner and simplifies things if you plan to sell or upgrade.
CONS OF PAYING IT OUT EARLY
Break or Exit Fees
Fixed-rate loans in particular may come with break costs, especially in the early stages of the loan. These can offset some or all of the interest savings, so check the numbers before acting.
Drains Savings
While it feels good to be debt-free, using up your emergency savings to pay out a loan might leave you vulnerable to unexpected expenses. Consider keeping a buffer in your account.
We can’t help you decide whether paying your car loan out is right for your situation, however if you are looking to buy a car and need a car loan, please get in touch with us.
*This information is general in nature and does not take into consideration your individual circumstances. Please contact us for further information.
