Things You Need To Know When Settling Your Car Loan Early!

Regret signing up for a loan with an exceptionally lengthy tenure? If you have the means to, you can actually pay it off and not have to pay the extra interest accrued.

In the event that you may perhaps have had access to a sudden windfall, it actually isn't unwise to pay off some of your bad debt. Apart from obviously having to pay less interest, there's a sense of satisfaction and relief, and you no longer have to service a loan.

But there's no free lunch. A financial institution's profits are built into your money repayments, and premature termination means they need to figure out a way to recoup that margin. We will break down the jargon and the figures, so you can determine if it's worth it to opt for an early settlement! 

Penalties

Most lenders follow the industry standard, which tabulates the final penalty sum by adding up 1% of the initial loan amount, to the 20% of the remaining interest.

This sum helps cover a bank's administrative costs incurred, as well as some of its profits. You may not always be better off fully paying off your loan at the earlier opportunity, as mobile funds can actually go some way into generate profits.

Which may overall result in you being better off servicing a loan instead of opting to fully pay it off. But then again, this really only applies if you are financially well-versed, and are capable of generating revenue from said sum of cash.

How Much Can You Actually Save?

It's hard to discern just how much one can save, so let's assume an initial loan sum and tenure as follows:

Loan Amount: $50,000
Tenure: 5 Years
Interest Rate = 2.50% p.a.
Total Interest = $6,250

Imagine in this context though that 25 months into the loan, you decide to pay off the full sum. Realistically, the sum you'll save, as compared to just fulfilling the loan, is as follows:

In this scenario, paying off your loan early will really only save you a smidge under $1,900. Which sounds significant, until you realise that it works out to a savings of around $55 a month for the rest of the 35 months.

Your cash therefore would have been better spent on a sensible investment with higher returns.

So Ultimately, Is It Really Worth It?

This heavily depends on the loan and interest rate. If the interest is high and you are in the early stage of your loan, it is very likely that an early settlement will be worth it.

However, on the flip side, if the interest rate is low and your initial loan is huge, and you are nearing the end of your loan term, it might not be worth it as you may be paying more due to the extra 1% fee. 

Also, if you are financially literate, it may quite literally pay for you to not pay off the outstanding sum instantly, as reinvestments can yield you a much higher return then being debt free in the first place.

You'll have to strike your own balance here, and find yourself a happy middle ground!

Simplify Things With the Aid of Motorist

Still, there's a better way to finance your next car. Motorist can find you the most optimal loan regardless of your needs. Paperwork support and competitive interest rates mean your car purchase is seamless.

Shop our extensive used car catalogue, then head on here to find out more on our automotive financial services!

Read More: Is a Personal Loan or a Car Loan More Ideal?

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