With the average price of a new car over $28,000 and a used car around $15,000 at the time of this publication, financing is an attractive option. The great thing about financing is that, unlike leasing, at the end of your contract you own the vehicle. However, the longer your loan is, the more you end up paying due to interest. Paying off your loan early will usually save you money.
The Early Bird Usually Gets the Worm
Paying off your loan early will help reduce the overall amount of interest you pay, therefore, reducing the overall amount you spend buying a car. You can usually add a little more to your monthly payment or do a one-time payment. There are several ways lenders can deal with an early payment. They may add it to your next payment, so if you continue to over-pay you will finish your loan early. Or, they may add it to your remaining balance. You'll want to check with your lender about its policy.
Some lenders may have a penalty for ending your loan early. Others may have minimum length requirements. You might also get tagged with an installment fee each time you decide to pay extra. Before you get a loan, check with the lender regarding their early-payment policy. If there's a small, flat fee, it may make sense to pay off your loan early. However, if the penalty is percentage-based, such as 5 percent of the total of your car loan, you may want to stick to the terms.
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