There are many benefits of paying off a car loan ahead of its schedule. You can save up some money and use it towards the fulfillment of your other financial goals.
For those who are having some trouble with their credit history, owing to high debts, paying off an auto loan is a great way to resurrect your Cibil score. If you have no idea where to begin, here are some pointers that are likely to help.
Take the case of 32 year old Debarshi Nag, a diligent employee in a Mumbai headquartered construction firm who has recently been promoted to with a 10 per cent increase in his salary. Debarshi, who is planning to apply for a home loan in the near future is aware of the fact that he needs to maintain, and if possible, improve his Cibil score above 750 in order to have his home loan approved in a hassle free manner.
Towards this goal, he wants to pay off his car loan with a tenure of five years that he had applied for in 2012. Here is what Debarshi can do:
Make one extra payment in a year
Making a payment of one extra EMI in a year may throw your budget haywire, but stretching the same payment over a year will help you achieve this goal with ease.
For instance, if your EMI is Rs 12,000, you divide that by 12. The result is Rs 1000. Add Rs 1000 to each month's payment and you will have paid one whole payment in a year, without feeling the pinch of making one large payment all together.
Rounding up your payment
You can also cheat yourself in making a higher payment towards your car loan by rounding off your payments, depending upon what your budget allows.
For instance, if your loan amount is Rs 11,540 you can round it off to Rs 12,000 each month. This means you are making an extra payment of Rs 460 per month.
This may seem like a small amount, but in a matter of 12 months you will have paid Rs 5,520 in the year, thus taking a slow and steady step closer towards the repayment of your auto loan.
Out of turn payments
Most banks and financial institutions are a little more flexible with car loans and can give you the opportunity to make out of turn repayments whenever you have some extra money to spare.
Banks call it the 'special tie ups' and may offer it if you are an existing customer or you approach them with a good Cibil score. You can use the extra cash that you get from yearly bonuses etc to make such payments on your auto loan.
However, it is best to discuss such repayment option possibilities before hand with your lender, to ensure that there are no penalties for such pre-payment opportunities.
Take on some extra work
Ever thought of earning some more money by milking your talent? For instance, if you are a great web designer and have done it for friends for free earlier why not do it professionally in your leisure to earn some extra cash that you can use to make your loan prepayment.
With so many opportunities for freelancers and social media forums, you can definitely try and use your talent to earn this extra cash! It may seem a little daunting at first, but you will soon discover that it is an incredibly satisfying experience!
Having a vehicle of your own is no longer a luxury but a necessity these days, and when you can own it without having to bother about monthly EMI payouts, the drive ahead becomes even more enjoyable!
Now that's a good enough reason to start planning for a prepayment of your auto loan! Don't you think?
Photograph: Todd Lappin/Creative Commons
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.