There are multiple reasons that back your decision of paying your car loan early. From complete ownership of a vehicle to satisfaction of living debt free, paying off loans early can provide you with all. However, there are multiple aspects associated with it that should be considered prior to paying off the loan.
We have listed the pros, cons and situations that are ideal to pay your car loan early. Let’s go through these aspects of paying off loans early in more detail.
Pros and Cons of Paying Your Car Loan Early
An auto loan is the first thing to consider when buying a new car in the UAE. The loan provides enough finances to purchase a car and then later pay the lender in instalments. However, if you have some additional finances, you can pay the instalments prior to the due date.
Here are some pros and cons of paying your car loan early that will help you in deciding whether to pay the loan early or not.
Pay your Car Loan Early: Pros
Here is the list of pros that you can avail by paying off your auto loan prior to the due date.
Increase in Savings
The instalment of a car loan includes a principal amount and additional interest on that amount. That said, borrowers are paying an additional amount every month until their loan is completely paid off.
Paying off your loan early will help in saving that additional interest amount that you are paying on a monthly basis. This saving can help you in different ways especially when you are living on a budget in Dubai or any other Emirate.
Complete Ownership of the Car
Till the borrower pays off the loan, car ownership is under the bank. Another benefit of paying your car loan early is that you can gain complete ownership of the car and all the perks that came along with it.
Increase Debt-to-income Ratio
The debt-to-income ratio (DTI) refers to the amount of debt paid contrary to the remaining principal amount. Paying a loan early can reduce the DTI that contributes to your overall financial situation. Similarly, if you opt for refinancing the existing auto loan in the UAE it will increase your DTI ratio, thus creating a negative impression on your finances.
The DTI ratio does not directly affect your credit score, but it is one of the factors that lenders consider before sanctioning another loan.
Pay your Car Loan Early: Cons
Now that you are aware of all the pros of paying off a loan early, here are some cons of paying off the loan.
Penalties for Prepayment
Some banks include a penalty for paying off car loans early to restrict borrowers from paying off their loans early. The amount of penalty is dependent upon the overall time left for the loan payment. These penalties may vary from bank to bank: therefore, you should concern your bank to know more about the prepayment penalties.
Budget Strains
In order to pay off the loan early people took desperate measures like liquefying their assets or straining their budget. Rather than any benefit, this situation will create financial and mental exhaustion.
Drop in Credit Score
The early loan payment can cause a dip in the credit mix and open account that eventually affect your credit score. However, this drop in credit score is temporary and is regained within a few months. Therefore, it is suggested to check your credit score in Dubai or in any other Emirate that you are currently living in prior to paying off the loan early.
How to Pay Off Car Loan Early
See the following ways for early payment of the car loan in Dubai and other Emirates. However, these ways are subject to the bank policy and the type of auto loan sanctioned to the borrower. Therefore, it is suggested to concern your bank before opting for any of the methods of paying off the auto loan early.
Increase Monthly Instalment
The first way of paying off a loan early is by increasing your monthly instalments. This will increase the principal and interest amount that you were previously paying and reduce the duration of the loan payment.
Partial Amount Payment
The large partial payment will also contribute to reducing the tenure of loan repayment and can save you from monthly instalments.
Full Amount Payment
Full amount payment is paying off all the remaining amount of the loan and opting for the early settlement. This will be the final settlement of the auto loan between the lender and the borrower.
These were all the aspects that are necessary to consider to pay your car loan early. Auto loans can help in purchasing a new car, but you have to repay the loan amount with additional interest. Therefore, the overall cost of the vehicle increases after paying off the loan. If you want to avoid this hassle of paying an additional amount, browse through these used cars for sale in the UAE and purchase a car as per your budget.
FAQs
Yes, you can pay your car loan early in the UAE. However, the early payment is subject to change from bank to bank. Therefore, prior you should concern your bank before deciding to pay off your loans.
No, soon after the payment you will observe a drop in your credit score. However, this drop is temporary and it will be regained within a few months.
Stay tuned to UAE’s leading auto blog for more information on car loan early settlement.
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