How to Pay Off Used Car Loan Faster

Paying off a used car loan faster than the agreed tenure is not only possible but can also help you on your way to becoming debt-free faster. It doesn’t matter if you already have a second hand car loan running or are about to take one, planning to pay it off as early as possible is never a bad idea. One of the main reasons you should be considering an early pay-off is that used car loan interest rates can be around 10.5% p.a. 

When you couple the interest rates with the snowball method of debt repayment, you’ll realise that the second hand car loan could be a quick win on the journey to repaying your debts. Basically, in the snowball method, you choose either the debt that has the smallest amount to repay or the one which has the highest interest rate to pay off first.

Even before you get into the specific steps that you need to take to repay a used car loan early, the very first thing you should do is to go through the terms and conditions very carefully. Once you have done that you can:

Pre-payment

Pre-payment is a technique where you end up closing a loan before its full tenure is over. In such cases you will end up repaying the entire outstanding balance on the loan in one go. You may need to pay a fee as well which can be a percentage of the outstanding principal amount. The advantage of choosing this method is that not only do you close the loan early, but you also save a little on the interest you would have had to pay if the loan had run its full course. As an added advantage, many banks and NBFC now let you make second hand car loan prepayments online.

Part-payment

Part payments are similar to pre-payments except that with part payments you are not closing the entire loan but just making a larger than usual payment. Banks and NBFC can have some rules that govern part-payments. They may limit the amount you can pay in the part payment along with the number of times you can do it in a year, or in the tenure of the loan. They can also have a fee that is applicable to such payments. This fee is usually a percentage of the outstanding principal amount.

Balance transfer

If you already have a used car loan running with any bank, or NBFC, you can apply for a balance transfer to another bank, or NBFC. While doing this, you can negotiate a shorter tenure and even a lower interest rate. The thing to keep in mind here is that negotiating a lower rate of interest may depend on the offer that is made by the new bank/NBFC and how good your CIBIL Score is, which you should be checking regularly.

Talk to the lender

You can also talk to the lender whom you currently have a car loan with and ask them to reduce the loan tenure. This may impact the EMI you have to pay by increasing it, but if the lender agrees, you’ll finish repaying the loan faster. You may also end up saving some money on the interest as a result of the shortened tenure. This may sometimes be referred to as refinancing, however, remember that it is not to be confused with balance transfer.

Take smaller loans

It goes without saying that you should only take a loan amount that you need. To ensure that you are able to repay your used car loan as quickly as possible, try to make your down payment as large as possible. This will allow you to take smaller second hand car loans, which in turn will allow you to repay quickly through larger EMIs paid over a shorter period of time.

While it is good to know how you can repay a used car loan quicker, it is also important to know why you should be considering it. The biggest advantages of paying it off early are that one of your debts is closed which takes some pressure off your finances. Another major advantage is that if you go in for a pre-payment then you can save some money on the interest of the remaining months. 

Not to mention the fact that the quicker you finish paying off the second hand car loan, the sooner you can sell it, if you want to. As long as you have a used car loan active, you cannot sell the car because there is a hypothecation attached to your car which prevents the car from being transferred to a new owner till such time as the loan is paid off and the hypothecation removed by the RTO.

Choosing to pay a used car loan off early does come with some distinct advantages like savings and reduced financial pressure. However, before you choose any of the options available to you, ensure that you have gone through the terms and conditions of the loan you currently have. You should also do some basic research and calculations on your own before narrowing down on any of the options available to you.