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How to pay your Car Loan early?
Prepayment charges for Car Loans can influence the decision to settle early, but doing so may ease your financial burden. This article explores how to effectively reduce your loan tenure through smart prepayments, selecting an affordable vehicle and managing expenses.
What is the prepayment of a Car Loan?
Prepayment is when you repay your Car Loan fully or partially before its due date. This can be handy if you find yourself with extra cash. However, watch out for Car Loan prepayment charges, which lenders might apply for early settlement. These charges are meant to cover the potential loss lenders face when they don't earn the expected interest over the loan's term. Additionally, be aware of the early payment penalty for Car Loans. This fee varies, but is usually a percentage of your remaining loan. The good news is that prepaying can reduce future interest payments, as the interest is recalculated based on your new, lower outstanding balance after early payment.
Prepayment procedure for Car Loan
Ease the path to financial freedom with a step-by-step guide to the Car Loan prepayment procedure.
1. Review your loan agreement for details on Car Loan prepayment charges. This document will outline the conditions and fees associated with early settlement.
2. Assess your financial standing to ensure you can afford prepayment. Make sure that prepayment is a viable option.
3. Contact your lender to notify them of your intent to prepay. Clear communication can prevent any misunderstandings and facilitate a smoother process.
4. Obtain the prepayment amount and any applicable Car Loan early payment penalty. This will give you a clear picture of the total amount you need to pay.
5. Decide on the prepayment date, factoring in your cash flow. Timing is important to ensure you have the necessary funds without straining your finances.
6. Execute the prepayment using your chosen payment method. Confirm the transaction method that is most convenient and secure for both you and the lender.
7. Request a formal closure statement from the lender. This document is crucial as proof that you have fulfilled your obligations and that the loan is officially closed.
Calculate foreclosure
Simplify your Car Loan closure calculations with these essential steps:
- Work out the amount you are planning to prepay
- Establish the duration of your loan
- Utilise an EMI calculator to figure out your monthly instalments
- Decide when you will be able to complete your loan payments and choose that month for foreclosure
- Add the Car Loan prepayment charges, usually between 2% and 5%, plus taxes
- Account for the prepayment penalty to your Car Loan cost, as it compensates lenders for lost interest
Steps for foreclosure
Follow these straightforward steps to seamlessly conclude your Car Loan early:
- Apply in writing for your Car Loan closure, either online or at a branch
- Collate all necessary documents: PAN, Aadhaar, driving licence, or passport; your loan paperwork; loan account details
- Present a bank statement as evidence of the last EMI paid
- The bank will inform you of the total due, including the Car Loan early payment penalty
- Settle all outstanding payments via cheque, demand draft, or online transfer
- Upon payment completion, the bank will assist with stopping future EMI deductions and return your car documents within 15 business days
Make additional payments
By making additional payments towards your Car Loan you can significantly cut down on the total interest accrued and shorten the loan duration. Take, for instance, a Car Loan of ₹5 lakh with a 9% interest rate over 5 years. Normally, you would pay a monthly instalment of approximately ₹10,380, amounting to a total interest of roughly ₹1.22 lakh. If you choose to pay an extra ₹5,000 annually, not only does the term decrease to 4 years and 7 months, but the total interest also drops to about ₹1.12 lakh, allowing you to save around ₹10,000. This strategic move can lead to substantial savings and bring you closer to financial freedom.
Things to consider before going for prepayment
- Use funds for better use: The money you plan to use for prepayment or foreclosure could be invested for potentially higher returns, especially if your Car Loan has a low-interest rate.
- Consider the penalty charges: You will have to pay extra for Car Loan prepayment charges and foreclosure fees. Lenders typically allow prepayments after 12 EMIs, but the penalty differs between the first and subsequent prepayments. So, it's important to understand your lender's terms and any Car Loan early payment penalty.
- Car Loan transfer: If you find a lender with better interest rates, you might consider transferring your Car Loan. Just remember, this will incur additional fees.
- Use a Car Loan EMI calculator: Always use the Car Loan EMI calculator, made available by Axis Bank, to work out your EMI, any prepayment penalty Car Loan costs, and total interest. This will help you decide whether early loan closure is financially beneficial for you.
Choose a car according to your budget
Selecting a car within your budget is a strategic move to manage your Car Loan payments comfortably. For instance, with a monthly income of ₹50,000, a reasonable Car Loan instalment shouldn't surpass 15%, equating to ₹7,500. If you opt for a ₹5 lakh Car Loan at 9% interest over 5 years, the monthly payment of approximately ₹10,380 would exceed this limit. It's advisable to consider a more affordable car or extend your loan term to keep payments within a manageable proportion of your income.
Keep a lid on expenses
Trimming your monthly outgoings can be an effective way to accelerate your Car Loan repayment. As an illustration, a monthly saving of ₹5,000 could be channelled towards a ₹7 lakh Car Loan with a 9% interest rate. Normally, you would face a monthly payment near ₹14,550, but by allocating the saved funds to your loan, you can reduce the term to roughly 4 years and 6 months, potentially saving close to ₹12,000 in interest, demonstrating the financial merit in curbing expenses. Creating a leaner budget and sticking to it increases your financial resilience, providing more flexibility to address the loan principal faster.
Also Read: How to get a Car Loan to buy your dream car?
Conclusion
Setting up a Car Loan swiftly necessitates financial discipline and astute planning. When buying a new vehicle, consider the comprehensive Car Loan options available, including loans from ₹1 lakh up to 100% on-road funding, with benefits such as competitive interest rates and rewards points.
Use the Car Loan calculator to estimate your EMI and take the next step towards making your car ownership dream a reality with a New Car Loan from Axis Bank.
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.
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