Advantages of Paying Off a Car Loan Early
Paying off a car loan early might be one of your financial goals. While it can be difficult to do, it definitely has some advantages. Paying off your loan early can give you flexibility in your financial situation that is not there when you have a car loan. If you are trying to decide whether you should make it a priority to pay off your auto loan early or not, here are a few things that you should consider.
With an auto loan, there are two different aspects of your loan payment. Each and every month, you are paying money towards the principal and the interest on the loan. Once you pay off the principal, the interest stops accruing. Let's say that you pay the loan off two years earlier than you anticipated. This means that you are saving two years worth of interest on the loan. This can amount to thousands of dollars by the time you add it all up. Therefore, it can save you a substantial amount of money depending on how early you pay off the loan.
Once you pay off the loan, you will have no car payment anymore. You can, instead, save the money that you would have spent and put it away into your savings account. Most of the time, your car payment will be in the neighborhood of $300-$600 per month. If you got a very expensive car, it could be even more than that. Not having that amount of money coming out every month can provide a lot of financial flexibility. You can do so many more things with the money besides giving it to the auto loan company every month. This will make your life substantially easier.
When you are spending a few hundred dollars a month on a car payment, you are throwing away money that you could be using to invest. Think about how much money you would have in an investment account after a few years of putting in $500 per month into it. On top of that, you will be earning interest on the money as well if you invest it properly. Therefore, when you have a car payment, not only are you losing the money on the payment, you are losing the potential interest that you could be earning as well.
Eliminate Gap Coverage
Gap coverage is designed to help people from becoming "upside down" on their car loans. With the high rate that cars depreciate at, people are often "upside down" from the moment they drive off the lot. For example, if you buy a car for $15,000, as soon as you start driving it, the value might drop to $10,000. Your loan is still for $15,000. If you had a wreck, the insurance company is only going to pay you $10,000 for the car. The $5000 difference can be paid by you or by the gap insurance coverage that you have. When you pay off your loan early, you can eliminate this monthly payment that may be figured in with your loan.