If you have purchased a car by availing of a Car Loan, then chances are that you may have wondered, "What if I pay extra on my Car Loan?" This question is crucial because understanding the impact of additional payments on your loan can significantly influence your financial strategy.
Paying extra on your Car Loan: The basics
When you make a Car Loan payment, it typically consists of two parts: the principal (the amount you borrowed) and the interest. By paying extra on your Car Loan, you can reduce both components faster. But what happens if you pay extra on your Car Loan, and how does it affect your finances?
Reduced interest payments
- Lower total interest: One of the primary benefits of paying extra on your Car Loan is the reduction in the total interest paid. Car Loan interest rates can add up over time, significantly increasing the overall cost of your vehicle. By paying extra, you decrease the principal amount faster, resulting in less interest accruing over the life of the loan.
Faster loan repayment
- Shorter loan term: Paying extra on your Car Loan can shorten the loan term. Instead of making payments for the full 5 years, you might pay off your loan in 4 years or even less, depending on how much extra you contribute. This accelerates your journey to financial freedom.
- Early ownership: Faster repayment means you own your vehicle outright sooner, freeing up your budget for other financial goals.
Improved credit score
- Positive credit impact: Timely and extra payments can positively impact your credit score. Lenders view early repayment favourably, as it demonstrates financial responsibility and the ability to manage debt effectively.
- Future borrowing benefits: A higher credit score can help you secure better interest rates on future loans, including Home Loans and Personal Loans.
Also Read: How to pay your Car Loan early?
Take control of your Car Loan
Paying extra on your Car Loan can have numerous benefits, including reduced interest payments, faster loan repayment, improved credit score and greater financial flexibility. Tools like the Car Loan EMI Calculator can help you plan and visualise the impact of extra payments on your financial situation.
When considering a Used Car Loan, it's important to select a relatively newer car model, ideally not more than 2 to 3 years old. This can improve your chances of obtaining the required financing, as banks often check the car model's age and discontinuation status. Additionally, ensuring that the combined total of the car's age and the loan repayment schedule does not exceed 8 to 10 years can be beneficial. Opting for loans with competitive interest rates and features like complete transfer support can further streamline the process.
For those looking to optimise their Car Loan strategy, considering these benefits and taking proactive steps can lead to significant financial advantages. Whether you're managing a New or Used Car Loan, paying more on your car payment is a smart move towards financial freedom.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
