Cars have been an increasingly essential means of transport in Canada and all over the world. As car prices skyrocket, many turn to auto financing to purchase a vehicle. Imagine that you get a financial windfall. In that case, should you pay off your car loan early?
The short answer is yes, but only if you don’t have high-interest debt or other urgent expenses you need to clear. However, if you can put that money to better use elsewhere, paying off your car loan early may not be a good idea.
Generally, settling a car loan ahead of its due date can have some significant benefits. Here are some of them.
Save Money
A portion of each monthly payment goes toward paying the interest that has accrued since the last time you made a payment. The rest of the money goes toward the loan principal balance payment.
When you pay more than the minimum monthly payment requirement, all the extra money will be used to pay down the principal. This practice can reduce interest on your loan and help you save money in the long run.
Fully Own the Car You Drive
Car financing entails owing money to a lender to purchase a car. Technically, the lender owns your car until you pay off the loan in full.
You must pay off the loan to take ownership of the vehicle. It means your name will be on the title, giving you the option to sell or trade your car whenever you want.
Only Pay the Car’s Worth
Cars depreciate over time. If your repayment terms are long and the interest rate is high, its value depreciates quicker than normal. As a result, you may be paying a loan significantly higher than your car’s value.
This is particularly concerning if you decide to sell or trade in your car. Most lenders would like you to pay the discrepancy in a lump sum so that you can proceed with the sale or trade. However, some lenders will allow you to roll the amount to a new car loan when you trade in your vehicle.
Improve Your Overall Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is essential in a lender’s underwriting process. This figure represents the percentage of your gross monthly income that goes toward paying debts.
If you pay off your car loan early, your DTI scores will significantly improve. In turn, it can affect your credit score. Although bad credit loans are possible, having high credit scores will open a lot of financial doors for you.
Reduce Car Insurance Costs
Lenders will typically buy collision and comprehensive insurance when you buy a vehicle through car financing. Although insurance policies protect you, the driver, lenders require you to purchase the insurance to protect their investment.
If you own the car outright, you will be in control of whether to continue paying for insurance after the loan has been paid off. Although you can stop the insurance, it’s still ideal to keep the policy so that you receive protection when an accident happens.
Free Up Some Money
The average monthly car loan payment in Canada is quite high. Canadians will pay anywhere between 300 to 800 CAD a month to pay off their car loans.
Clearing your car debt early enables you to use the extra money for other expenses. You can add the additional cash to your home loan repayments or keep it in the bank.
Conclusion
Clearing your auto financing obligations offers plenty of benefits. When you pay off your auto loan early, you can achieve many things. You can save money, own your car fully, only pay what your vehicle is worth, improve your DTI and credit score, reduce car insurance costs, and free up money.
When you need auto financing anywhere in Canada, turn to Get Approved Canada. We offer reliable auto loans and bad credit car loans to help you buy your dream car regardless of your credit rating. Contact us today and ask our specialists about our 0 percent down payments!
