Are you sick and tired of paying a car payment month after month? If so, you might want to consider paying off your car loan early. Why? Well, the most obvious reason is that it can save you quite a bit of money. But honestly, there are all sorts of reasons to pay off your car loan as fast as you can.
In fact, for the rest of this article, I’m going to delve into five of the key benefits you will experience by getting rid of your auto loan as soon as you possibly can.
So, if you’re ready to kiss that car payment goodbye, keep reading!
1. You’ll Pay Less Interest
To start things off, the top reason you should pay your car loan off early, or any loan for that matter, is that you will spend less money on interest. And the more interest you have to pay on your loan, the more money you’ll save by paying it off early.
For example, if you were to take out a 5-year auto loan of $25,000 with an interest rate of 5%, you would end up paying $471.78 per month. Over the course of 60 months, that adds up to $28,306.80. That means you would paying an extra $3,306.80 in interest.
Now, let’s imagine you decided to add an extra $200 to your monthly payment. That would not only shorten your payoff timeline by 19 months but also reduce the total amount of interest you have to pay to $2,222.15. That’s a difference of over $1,000.
To put it in simpler terms, if you want to spend less money on your car loan, pay it off early.
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2. It Can Reduce Your Car Insurance
When you have a car loan, you don’t have much of a choice when it comes to car insurance. Since you won’t actually own the car until you pay it off, you may be required to carry more, (i.e., more expensive), car insurance.
Since the financial institution that gave you the loan doesn’t want to get stuck with a big bill in the event that you get in an accident, you may be forced to carry more insurance than you really need.
However, the day you pay off your car loan, you get to decide how much insurance you want to purchase.
A good example of this is Gap Insurance. You see, gap insurance covers the “gap” between the value of the car, and how much they still owe in the event of a total loss. So when you don’t owe anything, there is no need for gap insurance. That’s just money you get to put into savings.
3. It Will Increase Your Financial Margin
Over the course of time, one of the most important lessons I’ve learned is that financial margin is the key to achieving your financial goals.
Financial margin is just the amount of money you have left after paying for all your expenses. And from your rent or mortgage to utilities and your car payment, every expense you add to your financial list is just money that you can’t put toward your savings or investments.
To put it simply, the fewer expenses you have to pay, the larger your financial margin will be. And with how pricey the average car payment is, getting rid of it can have an amazingly positive impact on your financial margin.
Think of it this way, if your monthly car payment is $500, then the day you pay off your car loan, you will immediately free-up $6,000 worth of your income per year.
That’s enough to fund your ROTH IRA, pay for a really nice vacation, or maybe even help you pay off your mortgage sooner. Even if you just use the money to save up and pay cash for your next car, paying off your car loan early can take quite a bit of pressure off of your monthly cash flow.
4. Peace Of Mind
Another benefit of paying off your car loan early is that it gives you a little extra peace of mind.
I don’t think it’s any big secret that debt can lead to quite a bit of stress. Whether it’s because you feel like you’ve stretched yourself a little too thin or because you’re worried about missing a payment, financial stress can be debilitating.
The good news is that the more debt you eliminate, the fewer financial obligations you will have to worry about. And when you worry less, you’ll find that life is a lot more peaceful.
5. It’ll Simplify Your Finances
Another one of the important lessons I’ve learned about finance is that simplicity is a fantastic indicator of future success.
What do I mean?
Well, the less complicated your financial situation is (i.e., the fewer payments you have, the less debt you carry, the more financial margin you have) the easier it is to focus on your financial goals. And the more focus (and money) you can put toward your goals, the more likely you will be to achieve them.
Ultimately, by paying off your car loan early, you’re reducing the complexity of your financial situation. And seriously, the simpler your financial life is, the easier it will be to achieve your biggest dreams.
6. It Will Reduce Your Financial Risk
Here’s something interesting, as a personal finance blogger, I’ve run into quite a few people that are nervous to invest their money. Actually, nervous isn’t even the right word. Rather, these people are deathly afraid of putting their money into the stock market because they think they might end up losing money.
Now, to be clear, I can understand the fear of losing money. However, the thing that baffles me is that many of those same people have a car payment that costs them hundreds of dollars per month.
So essentially, they are afraid to put their money into something that might lose money, but they are perfectly ok paying thousands of dollars (plus interest) every year for a car that will for sure lose money.
What’s my point?
Well, it’s simple. If you’re the kind of person that doesn’t like risk, then one of the first things you should do is pay off any and all of your car loans as soon as you possibly can.
From a financial perspective, a car is one of the worst investments you can make. Not only do they drop in value, but when you finance a car, you get the added pleasure of paying interest for your depreciating asset. Ouch!
7. Paying Off Your Car Loan Early Gives You Options
Whether it adds financial margin to your life, reduces your risk, enables you to invest and save more money, or even just allows you to take an extra vacation every year, when you own your car outright, you have options.
Do you want to sell your car? Just sell it and keep the money. There’s no need to pay off a loan or worry about being upside down.
Do you want to pick and choose what kind of car insurance coverage you pay for every month? That’s your prerogative. The bank doesn’t get to dictate what you do with your car when you own it outright.
Paying off your car loan early–or any other loan for that matter–gives you more options than somebody that owes money to a bank. That’s a little thing I like to call financial freedom!
Final Thoughts
If you have the money to pay off your car loan early, or you’re just considering paying extra toward your monthly payment, go for it. Having been through that myself, I can tell you that life without a car payment is significantly better than life with a car payment.
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