Should I repay my car loan early?


Do you have any extra money? You may have received your federal COVID-19 stimulus check (up to $ 1,400 per household member). Or you can have a tax refund (the IRS The average federal reimbursement so far is $ 2,967). You might find it useful to use this money to repay your car loan early.

Connected: Yes, you can refinance a car loan. Should you?

If you can make that choice after a year of economic disruption, you probably have company. A Bank of America poll in late February Reportedly found Only 36% of people said they would spend the majority of their stimulus check, while 30% said they would pay off debt, 25% said they would save it, and 9% would invest it.

Every situation is different, but there is a good argument that your car loan will make the debt pay off with that pandemic relief check or tax refund (or both). That’s because:

You need the car

You may also have credit cards, school loans, or a mortgage (or all of these). But in many countries you need your car for personal mobility, not to mention getting you to the job that you can stay at above with these other debts. This may be true if, or even because, you are struggling with these other debts.

“A car is little different because it’s such an integral part of people’s lives,” said Phil Reed, a financial advisory columnist on the financial advisory website NerdWallet. And he adds, “If you are in the bubble and you have difficulty paying for things, I recommend the car loan first because you need the car.”

You will see progress – and you will not be able to run it again

If you pay the extra cash for a larger mortgage or school loan, you will save interest in the long run, but in most cases the payoff will be many years away. The horizon for a car loan is closer and it is easier to see your progress, even if you cannot pay it all off right now.

Credit cards are a different matter. Many financial advisors advocate paying off your debt at the highest interest rate first. Thanks to the usual double-digit rates, these are likely to be your credit cards. That might add to your card debt priority over your car loan, but your cards also have a downside: you can just ramp up the balances and land back where you started. Not so with a fixed rate loan like your car. If you have the discipline to cash out your card and not start over, it might be a wise financial decision to make. But many people don’t do this, despite the best of intentions. You have to know yourself.

You have equity in your car

The money you put in the principal amount of the car loan (the amount you borrowed) will buy you equity in the car. Now is more yours, even if you cannot fully repay the loan.

“To some extent, it’s like an austerity program,” Reed said, “because the money you end up paying is more of the equity in your car.” It’s not that the money is going away. Justice is a real thing. “

Owning the vehicle also gives you more freedom. You can use it as a trade-in. You can sell it to a private party more easily. And you can easily switch to a different vehicle if your needs change.

“The concept of justice … doesn’t get any real resonance – but it gets really quick when you have to change something,” Reed said. “You drive a Miata [for example] and you have a baby “

You may not have a good car loan

If you bought your vehicle, you may not have bought in on a loan so you are paying an interest rate that is above the market. Or you could be hooked for a huge amount of total interest on a 72 or 84 month loan with a low down payment. Even if you qualified for low interest rates on such a long loan, you run the risk of being upside down (i.e., owing more than the vehicle is currently worth) for a significant portion of those months.

“So many people focus on how little they can take off and what [monthly] Payment, ”said Reed. “You don’t focus on the life of the loan – it can be upside down and you don’t want payments on a car that’s 6 or 7 years old. There may also be maintenance costs, and then you pay for both. “

It’s easy to hear. You can tell yourself by calculating how much car you can afford just by paying monthly. It’s even easier to do this at a merchant’s finance office, where the credit details can change in a variety of ways to get to a payment that you accept.

“It’s scary, but it’s been like that for a long time,” said Reed. “When you’re talking about money, they’re trying to get your attention to the ‘excitement meter’ – they’re talking about the car.”

When the excitement subsides and you find that you’ve signed up for an expensive loan, it’s an even bigger reason to use extra cash to help speed the way out.

“You save hundreds of dollars in interest and then you get the title of your car,” Reed said, adding that even a partial payment from the principal “gets you closer to that era when you get it.” [ownership of] it.”

They free up the cash flow for other debts

Your car loan may not be your largest debt, but it may be one of your larger fixed monthly payments. If you are able to lower your overall debt – which will add strength to the family balance sheet – repaying the vehicle can unleash significant cash flow each month. In return, you can use it to pay Another Fault.

Aside from the dollars and cents, paying back your vehicle is an intangible satisfaction, Reed said. “Not having a car payment is just a wonderful thing.”

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The Cars.com editorial team is your source for automotive news and reviews. In accordance with Cars.com’s longstanding ethical policy, editors and reviewers do not accept gifts or free rides from automakers. The editorial team is independent of Cars.com’s advertising, sales and sponsored content departments.


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