Are you now financially capable that you think of paying more on your car payment? Probably you got another job offer with better allowance and salary structure that when youget your auto loan? It is very possible for you pay more for your car payment since you now have extra money with you. However, before you make this decision, kindly note that it is important to be aware of how such decision will impact your auto loan payment, your credit score and even your financial status.
How Does It Work To Pay Extra on Your Car Payment
The first thing you should consider before you pay more on your car payment is that if your lender applies to payment to your loan principal or to the interest. A situation whereby you directly apply for extra payments to the principal (this means the total amount you borrowed), you are doing the right thing because such process will help you reduce both the amount you owe and the interest. But the issue is that most of the lenders don’t usually apply your extra payment directly to your principal account but rather put it to the additional interest accrued from the last payment and then take it to the principal amount. This shows that before you can conclude if the extra payment will be applied directly to your principal account, firstly know about what your lender requires before that can be done for you. Also, you can declare your wishes in writing format, you can also check your box online or probably mail your principal payments to different address.
Importance of Paying Extra on Your Car Payment
There are different benefits attached to extra payment on auto loan. Part of it include:
- You will have to pay less interest overall: Taking for example people that have 65-month or even 70-month auto loan time frame,they usually end up to pay quite a bit in interest over the term. In as much as your loan didn’t have precomputed interest, you will be able to reduce the amount of interest you have to pay when you pay extra.
- You will be able to pay off your loan on time: Another great importance of the decision to pay extra is that it will afford you to pay off your loan faster. However, the faster you are able to do pay off the loan, the sooner you will be able to have extra money that can be used for other financial tasks.
What You Should Consider Before Paying Extra
Just before you decide to pay extra money on your auto loan, it is expedient you think about this and put it into consideration:
- Will your lender accept extra payments: The fact is that there are some auto lenders that won’t accept early repayment altogether which means they won’t allow you to pay extra on your car payment. This means you need to know what your lender accept in loan terms.
- Are there any other higher interest debt: This is another issue you need to look into in such a case whereby you need to check out other debt if they have high interest or not such as credit card debt and many more. It is on record that auto loan interest rates are usually low to other loan interest rates. Therefore, in case you have extra money, it is advisable you use it to pay down high interest debt before thinking of low interest debt.
- How will paying extra car payment affect your budget: Be mindful of your budget expenses and make sure extra payment won’t stretch your budget to elastic limit. This is because it will be a bad idea that you later fall short of cash in your bid to make extra pay which will create high interest debt for you.
- Can you use this money for other things: Inline with your wants and needs, there might be other productive packages that you can use your money for rather than paying extra on auto loan. You might choose to increase in monthly savings contribution and emergency fund and many other scopes.
How Can Paying Extra Affect Your Credit
Be reminded that paying more on your car payment will affect your credit score and here are few things you need to know:
People that make just once or twice extra car loan payment might not really have issues with credit score but those that consistently make extra payments on auto loan would affect their credit score most especially if they are people that are just building their credit and do not have many credit accounts. The process is that your account will be closed the moment you pay off the loan. Meanwhile, when your account is closed, it might indicate that you are able to manage your credit in the past succesfully but open accounts have the opportunity because it will display to lenders how well you are able to manage credit at present. Also, your credit score will show how long you have been using credit and in a case whereby your auto loan is your oldest credit account, your credit score will get hurt when closed. When you close your auto loan, you are likely to reduce your credit mix because it is all about how many different kinds of credit you possess. The fact is that most of the credit cards make your payment based on how much amount of your available credit you use. This means that when you have a diverse mix of both installment and revolving credit (credit cards), you can easily boost your credit score. Lastly, kindly note that if your other credit accounts are having high balances,, pay off your loan can affect your credit score.
Make The Appropriate Decision
Just as we have discussed in this article, you need to put into a lot of considerations before you can decide to pay extra on auto loan. Know certain things such as your lender’s loan term, your personal financial needs and your credit score.
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