When you’re financing a car, the term “early settlement” may pop up, and understanding it is essential for anyone looking to pay off their vehicle loan before the agreed term ends.
How does early settlement start?
Simply put, early settlement means paying off your car loan ahead of schedule. Instead of sticking to the agreed monthly payments, you pay off the remaining balance in full, either at once or over a shorter period.
This can be an attractive option if you come into some extra money or want to reduce your financial commitments sooner. However, while it can seem like a good idea, it’s important to consider the impact on your overall financial situation.
One of the main benefits of early settlement is that you can reduce the amount of interest paid over the life of the loan. Car loans are often structured with interest charged on the outstanding balance, so paying off the loan earlier means you’ll pay less interest overall. However, it’s not always as simple as just paying off the loan.
What to consider before early settlement
Before deciding on early settlement, check your car finance agreement for any early repayment charges. Many finance agreements include a fee for settling the loan early, sometimes called an early repayment fee.
This fee can be a percentage of the remaining balance, so it’s essential to calculate whether the savings from reduced interest outweigh the costs of the early settlement charge.
It’s also important to review how early settlement affects your credit. Paying off your loan early could improve your credit score by reducing your overall debt. However, it’s crucial not to overlook how paying off the loan might affect any potential car finance deals in the future.
Is it worth it?
The decision to go for early settlement is entirely dependent on your financial situation. If you have the means to settle early without affecting your other financial priorities, it can be a wise move.
However, make sure you weigh the pros and cons. Consider whether the savings on interest and the feeling of financial freedom outweigh the potential charges.
