Isaac Diaz, who turned 40 in June, has put his plan to pay off his car loan into high gear.
“At the moment I’m concentrating on paying off my car,” says Diaz. “I’m so happy because I’m only a few months away from paying off this thing.”
Diaz owns a 2013 Acura TSX, which he refinanced for $ 15,249 in 2019 after buying it used a few years earlier. At the end of April, he still had around $ 4,999 on his loan. But in the past few months, Diaz has managed to save nearly $ 2,000, leaving his loan balance to just $ 2,999 on June 24.
Usually his payment for his car is $ 371 per month, but recently Diaz has been paying an additional $ 630 every month to bring it up to as much as $ 1,000 and help him get rid of the debt faster.
“I’m paying a lot more for this car loan, but it will pay off because the car is mine,” says Diaz. After his car is paid off, Diaz plans to use the money he paid for it to invest in his student debt. He still has about $ 6,000 on his student loan.
“It’s so hard to pay extra right now because I could do other things with that money, but it wouldn’t prepare me for success later,” says Diaz.
Why repaying a car loan can be a good approach
Experts say that car loan early repayment can be a wise approach if you can afford it. “Paying back your loans is always a good idea, and a car purchase is probably one of the biggest loans people take out besides buying a home to car research company Edmunds.
Aside from the peace of mind, there are tangible benefits to repaying your auto loan, says Montoya. For one, it can save you money in interest rates, especially if you have a 60-, 72-, or even 84-month car loan.
For example, let’s say you took out a $ 30,000 loan with a term of 6 years and a 5% interest rate. You’d end up paying nearly $ 35,000 ($ 30,000 on the original principal and just under $ 5,000 in interest). But if you pay off that loan early, you could cut some of that interest.
Paying back your car loan can also ease your monthly budget, says Montoya. With your car paid off, you now have extra cash that you can use to pay off other debts, increase savings, or spend on expenses.
But before they start repaying a loan early, consumers should check if their lender allows it at all, says Montoya. “Make sure you check what fees they would charge if you repay your loan early,” he says, as some lenders charge early repayment penalties.
Another trap to avoid, says Montoya, is the “temptation to want to buy another car.” Many people view repaying their loan as repayment and time to buy another car, he says. But in doing so, you lose the ability to own a car without paying for the car.
If paying back your car loan isn’t the right step, it may be worth considering refinancing. “If you have a high interest rate and your credit history has remained solid or has improved since you took out your first loan, it is definitely worth considering a refinance,” says Montoya.
At the moment, interest rates are “pretty low at the moment,” he adds. According to Edmunds, the average interest rate for a new car is currently around 4.5% with an average term of around 70 months. The interest rate for used cars is slightly higher at 7.7% with an average rental period of 69 months.
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