If you need a car but can’t afford to buy one outright, a car loan is the most common solution. A personal loan for a new or used vehicle, a car loan is designed to be paid back over a fixed term, usually between one to seven years. But what if your circumstances change for the better: a salary increase, an unexpected windfall? Can you pay off a car loan early?
Time Home Loans specialises in more than just home finance. We’re also a car loan broker in Australia that makes sure you receive the deal best suited to your needs. We can help you navigate the complex world of car finance including the various loan types to help you find the solution that’s right for you.
If you already have a car loan and you see paying off your debt as a step towards greater financial freedom, here is our answer to the question can you pay off a car loan early?
Can you pay off a car loan early?
Car loans are fairly flexible kinds of loans. The length of the term isn’t the only thing that differs from one loan to another. You can also choose between fixed and variable rates and several different kinds of loans including:
- Secured car loans, which use the car as collateral and offer lower interest rates because of it.
- Unsecured car loans, which come with higher interest rates in lieu of using the car as collateral.
- Fixed rate loans, which keep your interest rate the same throughout your loan term.
- Variable rate loans, which have interests that fluctuate based on market conditions.
Can you pay off a car loan early? Yes, although there may be certain fees attached to doing so. During the course of a fixed rate car loan, interest is calculated daily on the balance of your loan. Over a month, this amount is added up to become your monthly interest payable. If you “break” the contract early, any outstanding interest you owe would not be payable, and the lender may charge a fee to recoup the money lost.
So while you can pay off a car loan early, it’s important to make sure you can afford it.
Benefits of paying off a car loan early
The biggest advantages to paying off your car loan early include:
You’ll own your car outright
For many car loans, your vehicle is used as a form of security. Once you’ve paid off your loan, you’ll own your car outright and won’t have to worry about it getting repossessed.
Debt is cleared
Clearing a debt means you no longer owe money to the bank or a lender, which is always a weight off your shoulders. You can invest the extra money into other areas of your life such as saving or paying off your home loan.
Improved credit score
Paying down your debt well in advance also improves your credit score, which helps you get approved for future loans.
Saving money on interest payments
Although many lenders charge a fee for exiting the loan agreement early, this is usually still much less than you’ll expect to pay in interest if you see the loan through to the end.
How you can pay off a car loan early
Some common strategies for paying off a car loan faster include:
Round up your repayments
Paying off even a little extra per week or month helps you reach financial freedom sooner, even if the difference is incremental. Rounding up your repayments to the nearest multiple of 10 or 100 (e.g. 2000 instead of 1800) means an easier figure to remember.
Pay more frequently
If your income increases, it’s an excellent opportunity to pay off your car loan faster. Like rounding up your repayments, making additional monthly repayments reduces your debt little by little, month by month.
Pay with a lump sum
If you’ve come into a large sum of money like an inheritance or cash prize, paying a lump sum is a fast and efficient way to take care of your remaining debt.
Factors that influence home loan approval
The question of ‘how long does home loan approval take?’ involves several different considerations. Some of the most relevant include:
Documentation
If you have accurate complete versions of all the necessary documents, your home loan will usually be approved faster. Missing or inaccurate paperwork can slow the process down a lot.
Lender’s internal processes
Some lenders have a longer home loan approval process or more applications to get through.
The type of property
The kind of property you purchase has its own effects on the approval timeframe. For example, properties in rural and other less developed areas can require more detailed checks.
Financial factors
If you have extenuating circumstances that make your finances a little more complex e.g. self-employment or multiple income streams, this means more information for your lender to verify and likely delays in your process.
General timeframes
So how long does home loan approval take?
Although the process of a home loan approval is a variable one, here are some basic guidelines for what to expect during the home loan process. These timeframes are examples only:
Pre-approval
Home loan pre-approval (or conditional approval) means a lender has agreed in principle to lending you money towards a house purchase but hasn’t progressed to final approval yet. This stage gives you an idea of how much money you can borrow from the bank and can take anywhere from a few hours to a few weeks, with four to seven business days a reasonable expectation. Getting a pre-approval on your home loan can make the rest of the process run a lot smoother.
Application submission
You’ll need to fill out the application your lender provides and include supporting documents. The most requested documents are payslips (tax returns and financial statements if self-employed), bank statements and statements of current debts. This process can take three to five business days, longer if you can’t produce all the required documents.
Property valuation
Depending on the lender, we may order a valuation prior to submission, or the lender may arrange the property valuation after submission, a process which can take around three to five business days.
Lender’s mortgage insurance
If you’ve borrowed more than 80% of the property price, you’ll need to pay for lender’s mortgage insurance (LMI). This amount is calculated after the valuation and for most added to the loan (capitalised). This does not take any additional time within the process.
Loan approval
Once your property valuation and credit check are complete and you’ve obtained LMI, your home loan will be approved. This is highly dependent on the lender and can be from a few hours after submission through to two weeks.
How Time Home Loans can help
As an Australian car loan broker, Time Home Loans helps you navigate the various challenges and issues of car finance. Whether you’re buying a new or used car, we’ll help you get the best possible deal.
Experienced brokers and finance specialists, we’re 100% focused on providing you with options that meet your changing needs. Whether you need the answer to a question like “can I pay off a car loan early?” or you have a more detailed enquiry in mind, our car loan services are here to help. We want you to walk away with both the car and the car loan that suits your needs best. Book online for a personal and customised lending experience.