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How to pay off a car loan faster in South Africa

Posted 24.05.2021
How to pay off a car loan faster in South Africa

Cash is king, but sometimes a car loan is the only way you can buy a new set of wheels. In that case, you may wish to pay off the debt quickly, so you’re not stuck with monthly payments for the next five or even seven years. Also, remember, car loans come with interest. Therefore, the total cost of the car will be much more than the store price if you take longer to pay off the loan.

That being so, here’s how to pay off a car loan faster in South Africa.

What are the benefits of paying off a car loan faster?

Closing your car loan account at an earlier date can provide the following benefits:

Save on interest

In simpler terms, the faster you finish paying off your loan, the more interest you save. So instead of boosting the lender’s profits, you’ll have extra money to use for other things. Also, if you have a variable rate car loan, paying off the loan early means you won’t be affected if the prime rate goes up in the future.

Get full car ownership

Buying a car is exciting, but you can’t claim full ownership if you’re still paying off your debt. If you have taken out a secured car loan, it means the lender has the right to claim your car when you default on your payments. But once you no longer owe the lender any money or interest, the asset is all yours, and you can experience the thrill of true ownership.

Flexibility for your budget

Once you pay off your debt early, car loan repayments will no longer take up space in your budget. You can use the extra money for something else, whether it’s growing your emergency fund or treating yourself to something nice. Overall, having a freer budget puts you in a stronger financial position.

Freedom from debt

Sometimes debt can feel like a weight hanging over your head. That feeling of owing someone something is not nice, so you can imagine the peace of mind that comes with paying off your car loan early. Not only that but there’s a sense of achievement for all the hard work and sacrifice you’ve put into getting rid of your debt. You’ll likely sleep better and have less stress.

Credit score boost

Paying down debt is one way to improve your credit score and become an attractive borrower. That’s because you would have made repayments on time while avoiding late payments. Therefore, you’re more likely to get approval for other loans in the future since you pose a lower risk.

Reduces your debt to income ratio

Your debt to income ratio is a percentage that tells lenders how much debt you have compared to your income. If you have less debt and more income, your debt to income ratio will be lower, and again, this makes you an attractive borrower. In other words, the faster you pay off your car loan, the more your borrowing capacity for future loans increases.

Is it possible to pay off a car loan early in South Africa?

The good news is that yes, it’s possible to pay off a car loan in South Africa. The National Credit Act gives borrowers the right to pay more than the minimum monthly payment. So, let’s say you have to pay R347 every month. You can still pay R500 per month or any amount above R347 if you can afford it. 

Once the repayment process is over, the lender won’t charge you any more interest. However, keep in mind that early repayment may come with conditions and penalties.

What’s the penalty for paying off your loan early?

There’s more good news when it comes to paying off your car loan early. The National Credit Act has ensured you can do so without penalty as long as the loan amount is less than R250 000. However, if the amount goes above R250 000, you may have to pay up to three or four months’ interest. 

In that case, it’s up to you to calculate if the interest you’ll save is worth more than the cancellation fee. At times, it helps to talk to the lender ahead of time, let them know you’re planning to pay the loan off early, and check if they can waive any fees. 

How to pay off your debt faster

There are a few strategies you can use to clear your debt ahead of schedule.

Pay more than the required minimum

This is the most effective way to get rid of your loan early. Whatever the amount the lender says you have to pay every month, simply pay more than that. As your loan balance (the principal) becomes smaller, the amount of interest you have to pay every month also goes down.

Increase your repayment frequency

While monthly repayments are popular, weekly and fortnightly repayments are also a thing. For instance, if you have a monthly repayment of R400, you can make weekly payments of R100 instead. 

Alternatively, you can pay R200 every two weeks. If interest is calculated daily, reducing your principal way before the deadline results in lower costs in the long run. However, this only works if your cash flow cycle can adapt to the new frequency.

Make lump sum repayments

Besides paying more than the minimum, you can also make lump sum repayments to get ahead of your debt. This is usually possible if you get your hands on a little extra cash. For instance, you might win the lottery or get a large monetary gift, a surprise inheritance, or a bonus at work. 

If this happens, you may wonder whether to pay off debt or save, but in some cases, it’s worth it directing some or all of the money towards your loan.

Round up your repayments

Rounding up your repayments is as simple as paying R250 per month when only R216 is required—or paying R400 instead of just R363. The extra amount is generally small enough not to hurt your budget, and it all adds up in the end.

Refinance your car loan

Refinancing a loan can help reduce costs if you switch to a loan with a lower interest rate and fewer fees. This reduces your monthly repayments and makes it easier to pay off your loan faster. However, refinancing only makes sense if you save money. Otherwise, it’s not worth it if the cost of refinancing is too high.

Reduce loan fees and charges

Interest is not the only thing that makes a loan expensive. Fees and charges can also increase the total cost of the loan. While you can’t avoid standard loan fees like monthly administration fees and initiation fees, you can avoid late payment fees by making repayments on time. Also, sometimes it’s cheaper to get credit insurance and car insurance from a third party instead of through the lender.

Important tip: Be sure to use a car loan calculator

Being able to manage your repayments is crucial to the process of paying off your car loan early. A car loan calculator is a valuable tool that helps you figure out what’s best and comfortable for your budget. 

Take the vehicle finance calculator created by CompareLoans, for instance. It’s free, easy to use, and shows you your estimated monthly payment for a wide range of scenarios. All you have to do is input your amount and repayment period, then click “Calculate,” and you’re good to go. 

Here’s how Thabani saved money by paying off his car loan early

Thabani has taken out a R100 000 car loan, which requires a monthly payment of R2205 for 60 months at an interest rate of 10.25%. However, he doesn’t want to keep the loan for the full 60 months (5 years). So he starts paying roughly R2600 per month, thereby reducing his loan term to 48 months or four years instead. Here’s how the calculations look:

Total amount paid with a monthly payment of R2205

Monthly repayment: R2205

Interest: R28 196 

Total paid: R132 300 (inclusive of fees)

Total amount paid with a monthly payment of R2600

Monthly repayment: R2600

Interest: R22 333

Total paid: R125 616 (inclusive of fees)

Amount saved by paying off the loan faster = R6 684

As you can see, Thabani manages to save almost R7 000 by paying a lot more each month. Obviously, his savings can increase if he reduces his loan term to three or even two years by paying even more per month. 

This can make a huge difference, especially when a higher interest rate is at play. The faster you pay off your loan, the more you save. By the end, it’s possible to pocket tens of thousands of rands in savings.

Final Word

Paying off your car loan is totally possible in South Africa. The chief benefit you’ll get from this is the potential to save on interest, which makes for a happier wallet! Use the strategies mentioned above to start today and free yourself from debt ahead of schedule. From there, you’ll, hopefully, be in a better financial position to meet your other monetary goals.