Isaac Diaz, who turned 40 in June, abruptly tore up his plan to pay off a car loan.
“Right now, I’m focused on paying for my car,” Diaz says. “I’m so happy because I’m only a few months away from paying for this case.”
Diaz owns a 2013 Acura TSX, which he refinanced in 2019 for $ 15,249 after buying a used car a few years earlier. At the end of April, he had about $ 4,999 in loan. But over the past few months, Diaz has managed to save nearly $ 2,000, bringing the loan balance on June 24 to just $ 2,999.
He typically pays $ 371 a month for a car, but recently Diaz has been paying around $ 630 a month to bring that amount up to $ 1,000 and help him get out of debt faster.
“I pay a lot more on this loan, but it will pay off because this car will be mine,” says Diaz. After his car is paid for, Diaz plans to start transferring the money he invested in it into his student debt. He has about $ 6,000 left for student loans.
“It’s so hard to overpay now because there are other things I could do with that money, but that won’t lead me to success later,” Diaz says.
Experts say that early repayment of a car loan might be a smart approach if you can afford it. “It’s always good to pay off your loans, and buying a car is probably one of the biggest loans people take outside of buying a home, so this is a good place to start,” says Ronald Montoya, senior consumer editor. automotive research company Edmunds.
Apart from the peace of mind, paying off a car loan offers tangible benefits, Montoya said. First, it can save you money on interest, especially if you have a car loan for 60, 72, or even 84 months.
Let’s say you took out a loan of $ 30,000 with a maturity of 6 years and an interest rate of 5%. You end up paying almost $ 35,000 ($ 30,000 in the original principal and just under $ 5,000 in interest). But if you pay off this loan early, you can reduce some of that interest.
Paying off your car loan can also reduce the strain on your monthly budget, Montoya says. After your car has been paid for, you now have extra money that you can use to pay off other debt, increase savings, or cover expenses.
But before starting to repay the loan ahead of schedule, consumers should check to see if their lender allows it, Montoya says. “Make sure you figure out what fees they will charge if you pay off the loan early,” he says, as some lenders charge prepayment penalty…
Another pitfall to avoid, Montoya says, is “the temptation to make another car purchase.” Many people see loan repayments as a reboot and time to buy a new car, he said. But in doing so, you lose the ability to own a car without paying for the car.
If paying off your car loan is the wrong move, it might be worth considering refinancing. “If you have a high interest rate and your loan has remained stable or has improved since you took out the original loan, it is definitely worth considering refinancing,” says Montoya.
Interest rates are “pretty low right now,” he adds. According to Edmunds, the average interest rate on a new car is currently around 4.5% and the average term is around 70 months. Interest rates for used cars are slightly higher – 7.7% with an average loan term of 69 months.