According to an article in Canstar, Australians have an appetite for being indebted; they are in the 5th position in the ranking of the highest debt levels in the world. Car loans definitely are a contribution to that. The amount of interest can be dazzling.
Still, loans remain a good alternative for people that are in need of money to purchase cars; so they’re not inherently bad. But once you take a loan, you should pay it off as fast as possible. If you do that, you reap the benefit of paying less in interest.
Why would I pay the car loan early?
You can do this to avoid paying too much interest to the lender. It’s simple math: the longer the term of the loan is, the more you’ll be paying in interest. Moreover, you’ll be freeing a lot of cash flow each month. The sooner you repay the loan, the more spare money you’re going to have. Just logical consequences. But how do you pay that loan off early?
- Make an upfront payment: Many people don’t actually realise that repaying their debts sooner is a benefit. And it’s surprising. An upfront payment will reduce the total balance of the loan, of course. It will also lower the amount of your total debt, in case you have more than one loan.
- Cut some unnecessary expenses: This will allow you to make bigger monthly payments. In return, this is going to dissolve the loan faster. However, make sure that you still have money for maintenance, bills, and taxes. It doesn’t really help to pay the loan early if you’re no taking care of yourself.
- Make a payment once every two weeks: Not only does this method allow you to save some good money on interest, but it will also amount to a full month payment until the year has come to an end.
- Make a large payment once a year: It does not really matter when, as long as you do it. It will reduce the term of the loan considerably, as well as the amount you’d pay in interest.
- Don’t be late with repayments: This will only add more interest + other penalties. The loan will automatically be harder to pay. It also lengthens the term, as you try to cope with the outstanding debt you’ve put on your shoulders.
- Refinance the loan: This makes financial sense only if you get lower monthly repayments when you renegotiate them with the lender.
Australia is on the verge of a drastic debt crisis. 14,000 Aussies have tried to get in touch with a financial counsellor as of January 2017, from just 11,000 in January 2016. You can find more information on that in here. Unless you want to be a part of this rather sad category, you should try to pay off your car loan as early as possible. It’s the safest way of getting rid of the debt faster and of paying less in interest. As you’ve seen, you have many alternatives to do it. Please let us know your thoughts on the matter in the comment section below.