If you're looking to pay off your car finance early in South Africa, it is possible to do so. Settling your vehicle finance early will save you from the interest changes that occur over the long term.
Related: Car finance options explained; installment with balloon payment
Is there a penalty for paying off car finance early?
There are potential penalty charges, mainly on large agreements that fall outside of the National Credit Act. Financial institutions may impose early settlement penalties, which can reduce the amount of money you save by paying off your car loan early. (These penalties are typically equivalent to three to four months' worth of interest.) However, some vehicle finance companies may waive this interest if the client refinances with them.
How is the settlement calculated?
The settlement is based on the capital amount owed at the time, and interest is calculated from the last installment paid the previous month to the date the settlement amount is requested.
What credit score is needed for car finance in South Africa?
What are the pros and cons of paying off your car loan early?
Pros:
- Saving on interest: By paying off your car loan early, you'll save a significant amount of money in interest charges. In South Africa, the average interest rate on a car loan is around 13.5%, which is considerably higher than the interest rates on money market accounts.
- Boosting your credit rating: Paying off your car loan early can improve your credit score, as it demonstrates financial responsibility and the ability to manage debt. This can make it easier for you to secure loans in the future.
- Freedom from monthly payments: Once you've paid off your car loan, you'll no longer have to worry about making monthly payments. This can free up funds for other expenses or investments.
- Equity in your vehicle: As you pay off your car loan, the equity in your vehicle increases. This means that if you need to sell your car or refinance your loan, you'll have more equity to work with.
Cons:
- Loss of flexibility: By paying off your car loan early, you may lose some flexibility in your financial planning. For example, you may not be able to use the extra funds to invest in other opportunities or to cover unexpected expenses.
- Opportunity cost: If you have the funds to pay off your car loan early, you may be missing out on other investment opportunities that could yield a higher return. For example, you could be investing in a high-yield savings account, stocks, or real estate.
- Early settlement penalties: As we've mentioned, early settlement penalties may be imposed.
- Loss of tax benefits: If you're using your car for business purposes, you may lose some tax benefits by paying off your car loan early. For example, you may no longer be able to claim a portion of your car loan interest as a business expense.
How to pay off car finance early
Here are some tips to help you pay off your car loan early:
- Make extra payments: Some months you may find yourself in the positive financial position of being able to pay a little more than your contracted repayment amount. If making bigger monthly repayments won’t land you in financial trouble in other areas, then you should consider the larger payment.
- Avoid the ‘skip payment option’: While it is very tempting to accept these offers, experts say this will only extend your loan period. And while it may not seem like the worst thing, what’s usually forgotten is that the interest is attached.
- Make a bonus payment: For many people, making extra payments each month isn’t feasible. But for those who receive a sizable bonus, an extra payment is a good option that can help shorten your loan term.
- Advance Payments: You can deposit extra payments into the vehicle finance account, which will accumulate with interest and be seen as "Advance Payments." Once this cash accumulates to a sizable amount, you can contact the bank and ask for your loan to be recapitalized. With this, you can then decide between shortening your loan term or decreasing your monthly installment.
Paying off any debt early is not impossible but it does necessitate discipline and careful financial planning. Paying off your debt early is also a worthwhile sacrifice, as this opens the path to taking on other and/or bigger investments.
Related: Where can you finance a car with bad credit?
Useful tools on AutoTrader to help you with your calculations:
www.Autotrader.co.za/sell-your-car
Any information herein is not intended to constitute financial, insurance, tax, legal, investment, or other advice. Before making any decision or taking any action regarding these, please consult a suitably qualified professional
