Time For A Car Loan Health Check?

Has the reality of monthly car payments set in? If your car loan is a year or two old, you might be treating it as a set-and-forget expense, but this could be a costly mistake! The truth is that a car loan is an essential factor in your financial health and reviewing it annually is one of the smartest financial moves you can make.

With the competitive financing landscape and fluctuating interest rates, what was a good deal when you signed the papers might be costing you hundreds or even thousands of dollars today. Think of this article as your definitive 7-point checklist for conducting a full financial health check on your car loan. We’ll cover everything from simple payment adjustments to strategic refinancing, ensuring you can save money, reduce interest, and accelerate your path to debt freedom.

1. Increasing The Frequency Of Payments

The single easiest trick to save money on a car loan, without drastically increasing your budget, is to change how often you pay. When you took out your loan, you likely set up standard monthly repayments for simplicity (12 per year). But if you are paid weekly or fortnightly, you have a good opportunity to leverage your payment schedule.

• The Bi-Weekly Payment Hack - Instead of paying one full payment monthly, switch to paying half of your monthly payment every two weeks. There are 52 weeks in a year, which means 26 bi-weekly payments. Adopting this bi-weekly schedule, you automatically make one extra full payment per year without ever feeling a pinch on your budget.

Most auto loans use a simple interest calculation, meaning interest accrues daily on the remaining principal balance. When you pay fortnightly, you reduce the principal balance more often, which immediately lowers the amount of interest accruing the following day. This compound effect significantly shortens the loan term and cuts your overall interest paid.

2. Rounding Up Payments

Incremental principal reduction is a powerful tool - when you budgeted for your loan, you erred on the side of caution. Now, a year or two later, your budget may have more wiggle room, or you've simply become accustomed to the payment amount. This is the perfect time to commit extra money directly to the principal. For example, if your monthly payment is something like $385.74, you could round it up to a flat $400. The extra $14.26 is a slight adjustment to your monthly cash flow, but the overall impact to the loan is more significant.

When you make a standard payment, a portion covers the interest accrued since your last payment, and the remainder goes to the principal. When you add extra funds and specify that they go to the principal, you accelerate the amortisation schedule (a lower principal means less interest is charged the next month, and more of your next standard payment goes to the principal, creating a virtuous debt-reduction cycle).

3. Strategically Apply Windfalls

Unexpected money, often called a financial "windfall," should be viewed as an opportunity to shrink your car loan 9or any loans for that matter). Whether it’s a tax refund, an annual work bonus, or unexpected income from a side hustle, a lump-sum payment can shave months off your repayment term. But, before making any one-off payments, make sure you check if the loan carries a prepayment penalty.

A prepayment penalty is a fee charged by some lenders for paying off a loan early. If your penalty fee is greater than the interest you would save by paying early, the lump sum might not be worth it.

Lump Sum Repayment Checklist

1. Check Your Contract: Thoroughly review the fine print for any mention of "prepayment fees" or "early payoff penalties” or “early repayment fees."
2. Confirm Allocation: When making a lump sum payment, always confirm with your lender that the entire amount is directed toward the principal balance and not simply held as an "extra credit" against future scheduled payments.
3. Calculate The Break-Even: If a penalty exists, calculate the total interest you will save versus the cost of the penalty to ensure you are still coming out ahead.

4. Is Refinancing An Option?

A couple of years into your car loan is the optimal time to seriously consider refinancing. Market conditions change and your credit situation has likely improved, potentially qualifying you for a lower interest rate now than when you first bought the car.

Data shows that those who refinance often cut their average rate by one to two percentage points, leading to substantial savings on monthly payments. Specialist car finance companies, in particular, are a good option to investigate, often offering some of the most competitive refinancing rates.

When Refinancing Makes Sense

• Your credit score has improved
• Market rates have dropped
• You want a shorter term (e.g. from 60 months to 48 months)
• You want to remove a co-signer (freeing them from the debt obligation)

When It Doesn’t …

Be cautious of refinancing solely to achieve a lower monthly payment, especially if it involves extending the loan term (for example, refinancing a 3-year remaining loan into a new 7-year loan). While the monthly payment will drop dramatically, you will likely pay significantly more interest over the total life of the debt. Always focus on the total cost of borrowing, not just the monthly figure.

5. Review And Cut The Expensive Add-Ons

When you purchased your car, you were likely presented with a menu of optional extras that were then rolled into your total loan balance, where they accrue interest just like the car itself. These expensive add-ons might need a quick review. Some examples might be:

• Guaranteed Asset Protection Insurance: Covers the difference between your vehicle’s depreciated value (what the insurance company will pay) and the amount you still owe on the loan if the car is totalled or stolen. If your vehicle is no longer "upside down" (meaning the car's market value is now greater than the outstanding loan balance), long story short, you may no longer need this insurance.
• Extended Warranties/Service Contracts: If you purchased an extended warranty or service contract, check the refund terms. If you decide you don't need the coverage, you may be eligible for a pro-rata refund on the unused portion, which can be applied directly to your loan principal.

6. Avoid Payment Deferrals And Breaks

Payment breaks or deferrals can look tempting, especially around the holidays or when money is tight. Your lender may even market them as a "perk" once you have a good payment history. However, payment breaks are a financial safety net, not a perk. They always cost you more money in the long run.

When you defer a payment, the interest that would have been covered by that payment does not disappear; it continues to accrue, and the outstanding interest is often capitalised (added) to your principal balance. This higher principal balance then accrues even more interest going forward. Your loan term is extended, and your final interest cost increases.

• When To Use It: Only utilise a payment deferral in a true financial emergency (job loss, medical crisis) to protect your credit score from missing a payment. If you're considering it for discretionary spending, it is best you reconsider.
• The Proactive Alternative: If you anticipate trouble, contact your lender immediately and ask about a hardship program. Some lenders may temporarily reduce your interest rate or set up a temporary reduced payment plan without officially "deferring" the payment, offering a slightly less costly solution.

7. Know Your Total Repayment Amount

Before you make any major decision, whether it’s making a lump sum payment, refinancing, or selling the car, you must know the precise cost of full repayment. This figure is often different from the "Current Balance" listed on your online portal.

• Current Balance: The balance as of the last statement date.
• Payoff Amount: The exact amount required to clear the loan today. This figure includes all interest accrued since the last payment, any applicable early repayment fees, and sometimes even administrative costs.

Always request a formal, written "Payoff Quote" from your current lender. This is the only figure you should use when calculating potential savings or when working with a new refinancing company.

Your financial situation is constantly evolving. By making it a point to perform a detailed "Car Loan Health Check" every 12 to 24 months, you move from being a passive borrower to an active, strategic debt manager! Want to talk car loan refinancing with the experts? Get in touch with the team at CarMoney today!

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