‘Will it be cheaper for me to pay my auto loan early?’ [Newbie Guide]

Although we would like to wish otherwise, paying in cash for a new car is a luxury that few buyers can afford. That’s why financing is the norm for car purchases. Take note that contrary to what the dealership says, it’s not the only mode of payment for your preferred model, but that’s a discussion for another time. 

Most car buyers purchase their cars through financing  

Anyway, car financing involves making monthly payments within a specified loan contract period. These details are all agreed upon between you and the bank, dealer, or other financing institution prior to finalizing the transaction. This should be no problem if you have a stable source of income, at the very least. 

Occasionally, a stroke of good luck might lead you to have a bit of disposable cash, or you could have saved a substantial amount of money that leads you to consider paying the loan in full earlier than scheduled. Sounds like a plan, but will it necessarily be cheaper for you than just sticking with the original loan schedule? 

Making changes to a contract that you've already signed is not that simple  

The upsides to closing your car loan early are certainly appealing. For one thing, you get to save on monthly interest payments. Paying off the loan in advance means you free up any further incoming funds for other needs, or even set it aside for emergencies. Also, you won’t get to owe more money on your auto loan than the car is worth, which is usually the effect of depreciation.

However, there are also disadvantages to ending the car loan early. First, you may have to deal with pre-termination fees, since the bank will cease to earn income from the interest that you pay every month. 

Sometimes it's better to leave the auto loan duration as is

Second, you could be handling other kinds of debt such as credit cards, and if those have a higher annual rate, it makes more sense to pay them first. By extension, if paying off your auto loan means compromising your other expenses for the month, then it might not be such a good idea. 

Third, while closing off your car loan account is good for your personal finances, letting it run for the original duration might be better as far as your credit rating is concerned. This is especially true if the auto loan is the oldest (or only) account that you have, as an ongoing loan helps you build a positive credit history, showing lenders that you can responsibly manage debt. 

Find more tips for beginner car owners at Philkotse.com.