Fast-track your car loan payoff with these hacks

We have said it several times, and we’d say it again - navigating the car-buying lanes is not easy. It is a path filled with tough decision-making and, of course, luck. The latter complements the former, as despite all the research and guidance, you may end up making poor choices, be it selecting the model or insurance, or finance partner.

There is not much you can do about the purchase other than adjusting or selling, and as far as the insurance provider is concerned, you can always switch; here’s how. However, it is the latter we are worried about, i.e., an inappropriate finance partner. But like most problems, this one can be ironed out. How? We’d say get rid of the auto loan as fast as you can, thus ending ties with the provider once and for all.

However, there are a few factors worth considering before you decide to pay off your loan early. In this article, we’ll not only be discussing those factors but also tips to pay off your loan faster.

So, let’s get started.

Essential factors to consider when deciding to pay a car loan early

Whether you are taking a car loan for a new purchase or have already taken one and are planning to pay it off early, here are a few factors to consider before moving forward in your journey. Learning about them can help you immensely to get rid of car loans early.

Factor 1: Interest rate

In the Philippines, a borrower mostly comes across fixed-rate car loans, the other less popular option is a variable-rate car loan. The former is a car loan wherein the contract mentions a predetermined interest rate that remains the same for the entire duration of the loan (typically 36 to 84 months). As for the interest rate, banks in the Philippines offer as low as 4.10% to as high as 37.63%, depending on several factors like the borrower’s credit score, debts, income, car’s condition, etc. In case you pay off the loan early, there’s no need to pay any more interest. Therefore, it is essential to compare the interest rates of different lenders, as it is a very crucial component in managing your budget throughout the loan term.

Also Read: How to negotiate the best interest rate for your car loan

Factor 2: Prepayment penalty

Did you know that, as per the Consumer Act of the Philippines, it is illegal for banks to impose an actual penalty on borrowers? Therefore, the prepayment penalty is tagged under the name ‘processing fee.’ Banks or financial institutions often implement them to cover the losses incurred due to the borrower ending their agreement before the pre-decided loan tenure.

Therefore, it is often recommended that borrowers inquire about such penalties beforehand to save additional costs. In case, the penalty charges exceed the interest savings done by paying the loan early, it is better to just drop the idea.

Factor 3: Consider other financial obligations.

In case you are thinking about paying off your car loan earlier than the set tenure, it is important to have a thorough look at your other financial obligations, like other debts, monthly bills, and investments. In case you have money to cover all your bills and debts, it’s okay to pay your auto loan early. If not, stick to the pre-decided monthly payment setup.

How to pay off a car loan early?

The answer to this question is not one size fits all. The tips we have here vary as per the reader's financial personality (a disciplined saver, hustler, or cautious planner) and their current loan stage (just taken the loan, a year into the loan, and almost done with the loan). Let’s discuss each one by one. 

Tips based on the borrower’s financial personality

Disciplined savers

Disciplined savers, you are good with money and know your finances well. Here are a few tips to get rid of the loan cycle early.  Make an extra payment: A disciplined saver can be expected to pay a few extra thousand pesos every month towards the loan. Thus, getting free before the loan term. Reinvest earnings: A disciplined saver is expected to make use of their savings or other deposits smartly. So, here we’d like to suggest reinvesting earnings from such savings towards the loan payment. Channel bonuses smartly: We are sure you must be wisely investing your bonuses, however, this time around, use it as a lump-sum payment towards your car loan. Create a fund: Another smart and easy way to pay your loan early is by building a separate fund for the purpose. Top up this fund regularly and treat it like a short-term investment goal (paying off a car loan early). Try a round-up scheme: Make it a habit to round up your day-to-day expenses and transfer that extra bit of money towards your loan payoff fund. For example, if you spend PHP 95 on coffee, transfer PHP 5 towards the fund. Month-end sweep: Make it a point to put the leftover money from your monthly budget into your car loan payment.

Also Read: Car Loan Restructure: Everything a Filipino needs to know before applying

Hustlers

Hustlers, you are one if you are constantly finding ways to earn more. Here are a few tips to pay off your loan early. Set aside a percentage of your side income. Make it a point to dedicate a percentage (it might be as small as 20%) towards your car loan. After a big commission or project, make it a point to make a lump-sum payment towards your loan. If you are the type of hustler who earns side income from trading, try making mini payments every time there is a profit. Make use of online offers. Applications like GCash, Shopee and several delivery apps can be used to make payments because they are loaded with offers. Also, the cashback you receive from such apps can be combined and used towards loan payments. As and when your side income grows, increase your monthly loan payment amount; don’t stick to a fixed amount.

Cautious Planner

If you are someone who likes to be financially stable, takes less risk, and likes everything to be in control, then you fall under the cautious planner category. Here are some tips for you to pay off the loan early while being steady and safe financially.  We won’t advise you to target all your extra earnings from savings or bonuses towards loan payment straightaway, as it would create an imbalance in your budget. Instead, we’d ask you to build a buffer, i.e., save for at least 3 months' worth of loan payments and then start making early payments. Every time you make an extra payment, adjust your budget; this will save you from overcommitting. Mark specific months in the year to make big, extra loan payments. To keep you motivated and anxiety-free, we’d advise you to track how much you have saved up on interest and how early you’ll get rid of the loan. If possible, try staying one month ahead of the payment schedule. Doing so will not only cut interest but also give you a little breathing room to adjust and analyse. Being a cautious planner, we’d advise you to check with your bank about the early payment penalty.

Also Read: How to budget for your car loan repayment effectively

Tips based on the borrower’s loan stage

Don’t worry if you are not able to box yourself into one of the above-mentioned financial personality types. You can also plan your loan prepayment strategy based on the loan stage you are at, i.e., just took the loan, a year into the loan, or almost done. 

Just took the loan

If you just took the loan. This is the best time to start planning and paying off the loan early. Here’s how - If your budget allows, start paying a few thousand pesos extra each month. Don’t wait for the loan payment due date; pay as soon as you can, and it will reduce the interest from the beginning. Accommodate your budget for overpayment early on, and it will gradually become a habit, and you won’t have to struggle later. Try dedicating any side income or bonus towards the loan payment. While doing all this, do not forget to check the loan terms, see if it allows prepayment penalties.

A year into the loan

If you are already a year into the loan. It is time to tweak your budget and financial habits to accommodate an early loan payment strategy.  It is time to tighten your budget and squeeze in a few thousand pesos towards your loan payment. Each month, pay a comfortable percentage more than your monthly due. Decide on a fixed interval (like every 10th or 15th month) wherein you’ll make an extra full payment. Start dedicating your bonuses or income towards loan payment.

Almost done paying the loan

If you are almost done paying the loan. At this point, we have a few tips to offer you to finish strong - Do a loan review, see how much is due and how much you will save by paying it all now. Some lenders in the Philippines offer full settlement discounts. Ask your bank or lender for such rebates.  If your financial commitments allow, pause all your big expenses for the movement and allocate all the money towards the loan payment. Try using your bonuses, tax refunds, any commission or cashbacks towards settling your loan.

 

Also Read: How to budget for your car loan repayment effectively.

Mistakes that can slow down your car loan payoff

• If you wanna pay your car loan early, don’t make the mistake of sticking to the exact monthly payment amount. This will only keep you on schedule, but never let you move ahead.
• Closely monitor your loan payoff timeline, as it helps you not only see how close or far you are, but also tells you if you are just on schedule or behind.
• Don’t make the mistake of wasting your side income or year-end bonuses on insignificant wants. Instead, use it for prepayment.
• Missing payments or paying late fees is a blunder you can’t afford to make. It will result in late payment fees and will poorly reflect on your credit score, too.
• In case the interest rate drops or your credit score improves, don’t miss the opportunity to refinance a car loan.
• Don’t fall for unnecessary lifestyle upgrades (travel, gadgets, etc) before clearing the car loan.
• Never ignore your loan terms, look out for prepayment penalties or hidden charges.
• Last but not least, never delay a full settlement if you can. It will only lead to you losing money on interest. 

Bottom line 

It is a fact that by taking a proactive approach towards your car loan, you can significantly lower your financial burden and thus gain more control over your finances. You can do so by paying off your loan early in one of the following ways: refinancing, making extra payments or cutting unnecessary expenses. You’ll get to enjoy the perks of staying committed to your goal of paying the loan early, i.e., saving a considerable amount of money on interest and having funds at your disposal for lucrative investments and emergencies. 

 

Also Read: Pasalo Car Financing: How it works & what to watch out for