So, you just got a new car! Congratulations. Whether you’ve purchased a pre-owned vehicle or a brand-new car, we’re sure you’re excited.
Now, you’re ready to make monthly payments for the next 60-72 months. But wait – what if we told you that it’s in your best interest to pay off your car as soon as you can, and make more than your minimum payment?
It’s true – especially if you have bad credit. While it may be tempting to only make your required installment payment, paying down extra towards your car loan is a great financial move. Here’s why.
1. You Probably Have A High Interest Rate
If you have a 15% interest rate on a loan of $15,000 for a used car – which is fairly common if your credit score is around 600 or lower – you’re going to end up paying $357 a month for 60 months.
That doesn’t sound too bad, right? Well, here’s the thing – you’ll end up paying $6,411 in interest! That means the total cost of your car, over 5 years, is more than $21,000.
The higher your interest rate is, the more you can benefit by paying down your loan more quickly. If you can pay just $150 more per month, you will save nearly $2,500 in interest payments. That’s a big deal!
2. You Pay The Most Interest During The First Months Of Your Loan
Loan amortization is confusing to some people. Basically, amortization means that you pay more interest during the first few years of your loan – you can use a calculator from Bankrate to calculate amortization.
Essentially, you will pay most of what you owe in interest when your loan begins. That means that, the sooner you begin making additional payments, the more you’ll save.
It’s still beneficial to pay more than you owe later on in the amortization schedule – but starting sooner saves you even more money.
3. You Can Free Up Monthly Funds For Other Purposes
Once your car is paid off, you’ll have much more flexibility. The average car payment is nearly $479. If you can budget well enough to pay your vehicle off early, you’ll have much more financial stability.
4. You’ll Own Your Car – And Nobody Can Take It Away
If you have bad credit, the fear of repossession is very real. If you fail to pay your auto loan on time, the lender can take your car. But once you’ve paid down your auto loan, the car is yours. The lender will send you the title, and you will be the legal owner. Nobody will ever have the legal right to take it away, unless you use it as collateral for another loan. (Which we don’t recommend!)
5. You Can Boost Your Credit Score By Lowering Your Debt-To-Income Ratio
Your debt-to-income ratio measures how much debt you have vs. how much money you make per month. If you had a 1:1 debt-to-income ratio, for example, you would be spending all of the money you make each month just to pay off your debts.
If you can lower your debt-to-income ratio, you will be able to free up funds for other purposes, and increase your credit score. If you make consistent, timely, and early payments on your car loan, you will seriously build up your credit score – and lowering your debt-to-income ratio is just icing on the cake!
Follow These Tips – Save By Paying Your Car Off Early!
If you have bad credit, but have recovered and are now in good financial health, there are a lot of benefits to be had by paying your car off early – these are just a few of them.
Need a used car in Winnipeg, but have bad credit? Don’t worry! At Ride Time, we have a network of 15+ lenders who can help you. We will get you a great rate on a high-quality used vehicle. Browse our stock now, and contact us for a viewing!