Car Loan Prepayment: Process, Charges, and Methods to Prepay a Car Loan

Quick Summary:

• Prepaying car loan: Repaying a car loan ahead of the due date is what is meant by car loan prepayment. It is a crucial aspect of responsible financial planning and management.
• Merits and demerits: Car loan prepayment makes you debt-free faster and saves on total interest paid, among other merits. However, prepayment charges and early payment fees can be major drawbacks in certain scenarios. 
• Types of car loan prepayments: The first type of car loan prepayment is part prepayment, where a portion of the outstanding principal is paid before the due date via a larger payment than the EMI. The second type is full prepayment, where the entire outstanding amount is paid before the end of the loan tenure.
• Alternative measures: Measures like refinancing your car loan with lower interest rates, making accelerated monthly payments and utilising bonuses or tax refunds for prepayments can also help save on car loan interest. 

Car loan prepayment is an excellent option for borrowers who want to settle their loans early and reduce their financial burden. Instead of sticking to the original course of the car loan, you can make prepayments to settle the debt early with the lender. However, there are several important factors to consider before proceeding with their decision of prepaying their car loan, such as early prepayment charges for car loan, car loan prepayment penalties, etc.

In this article, we will discuss the various aspects of prepayment in car loan and how Mahindra Finance can provide easy finance solutions for your car loan needs. 

What is Car Loan Prepayment?

A car loan prepayment is when you repay the car loan in part or in full before its original due date. This can be a very convenient choice for individuals who have extra cash in hand and want to put it towards settling their existing debt. There are basically two types of auto loan prepayment: one is car loan part prepayment, and the other is full prepayment. Depending on your preference and financial standing, you can pick between these two.

Prepaying a car loan not only helps borrowers become debt-free sooner, but it also saves them money in the long term and may improve their credit score.

Suggested Read: How Does Car Loan Tenure Affect EMI Calculation?

Benefits and Drawbacks of Car Loan Prepayment

While there are major benefits of car loan prepayment, one must also be aware of the related drawbacks. Here are the major advantages and disadvantages of auto loan prepayment:

Advantages

1. Prepaying your car loan helps you reduce your financial burden and clear your debt early. Once you don’t have car loan EMIs to worry about, you can utilise your money on other ventures. 
2. Prepaying your car loan reduces the total interest paid because interest is calculated on the remaining principal balance, which decreases after each prepayment.
3. If you clear your car loan early, you don’t have to worry about hurting your CIBIL score (credit score) due to potential delayed or missed payments in the long run. A good credit score helps get better loans at lower interest rates. 
4. Secured car loans are the most common, and they have the vehicle itself as collateral. Hence, by prepaying your car loan, you can get full legal ownership of the vehicle sooner and remove the hypothecation from the car’s RC.

Disadvantages

1. While it varies depending on the lender, most of the time, there are additional costs you may have to bear when paying a car loan early. They come in the form of prepayment charges for car loan or an early payment penalty.
2. Another demerit of auto loan prepayment is the loss of cash in hand. While prepaying the debt early helps lessen the financial burden, it may leave you unprepared against the risk of financial emergencies. So, it is important to opt for prepayment only if you have sufficient surplus funds.
3. The loss of opportunity is yet another demerit you have to look out for. For instance, if you have a low-interest car loan, the extra money to be paid to close the loan early may yield better results if invested elsewhere.

How to Prepay Your Car Loan: Step-by-Step Guide?

The procedure to prepay your car loan is quite simple, actually. Here is a general outline of what you should do:

Checking loan terms and conditions

The first and foremost thing to do is to review the loan agreement. Get a clear understanding of the terms and conditions related to prepayment in car loan. You should know that the necessary requirements and restrictions for this process differ from lender to lender. After this, evaluate your financial standing and ensure that a prepayment is plausible. 

Notifying your lender about prepayment intentions

After that, you need to inform the lender of your car loan about your intentions of prepaying it. An agent from the lender’s side will get in touch and walk you through the process. Make sure to clear all queries before proceeding to ensure the process goes smoothly. 

Calculating the amount to prepay

Calculate the amount you have to prepay and what impact it will have on the remaining loan balance. Choose the prepayment method, which is either a full or a part prepayment of car loan. Provide necessary documentation and initiate the payment via online or offline method. Once the payment is done, obtain the receipt. In case of full prepayment, request a statement of loan closure, while in case of car loan part prepayment, request an updated payment schedule that shows the adjusted tenure and EMIs. 

Prepayment Charges: What to Expect

While prepaying a car loan has its benefits, you must also be familiar with the associated charges levied on early settlements. A lender usually levies prepayment charges for car loan and an early settlement fee to cover the potential loss they face when they don’t get the anticipated interest as per the original loan term. These charges vary from lender to lender, but the main prepayment car loan charge is usually a percentage of the principal outstanding amount. It also depends on the type of prepayment, i.e., full or part prepayment of car loan, and the timeframe when it is being settled. 

When choosing a car loan, you must consider the prepayment charges across different lenders, be it banks, non-banking financial companies, etc. Mahindra Finance answers all your car loan requirements with attractive interest rates. With vehicle loans from Mahindra Finance, pre-closure charges are kept at a competitive rate. As of September 25, Mahindra Finance charges 6% on outstanding principal for foreclosure during the first 24 months, and 3% thereafter. These rates are subject to change – please verify current charges with the lender.

While at it, don’t forget to negotiate zero or lower prepayment charges for car loan with the lender. For this, you will need to research and compare options, and then you can negotiate available choices and even leverage your strong credit score. 

Suggested Read:  Tips On How To Pay A Car Loan Early & Efficiently

Methods to Prepay a Car Loan

There are basically two types of prepayment in car loan that you need to know about. They are:

Lump Sum Payment

A lump sum payment or full prepayment is when you pay off the entire outstanding amount prior to the end of the loan tenure. It basically means closing off the entire car loan early, and the lender will give you the NOC. If you have the funds to make a full prepayment, factoring in the foreclosure charges and penalties, you can go with this option.

Part-Payment or Additional Payments

A part prepayment of car loan is where you pay off a portion of the car loan by making an additional/larger payment than the selected EMI prior to the end of the tenure. It helps reduce the outstanding principal, and you can get an updated payment schedule with adjusted tenure and EMIs.

Alternative Approaches to Save on Car Loan Interest

Here are some alternative ways to save on car loan interest: 

Refinancing your car loan

One of the key ways to save on car loan interest is by refinancing. It basically means taking a new loan in order to pay off your existing car loan. With this, you can restructure your car loan with revised and favourable terms, usually by picking a lower interest rate. 

Accelerated monthly payments

Accelerated monthly payment is basically a way to save on car loan interest by repaying the loan sooner, usually through larger, additional or frequent payments. Check with your lender to see if this option is available. 

Using bonuses or tax refunds for prepayments

You can use your extra cash inflow that you get with yearly bonuses, wage raises or tax refunds and strategically utilise it towards making prepayments for your car loan.

Conclusion

Car loan prepayment helps you become debt-free sooner and get full legal ownership of your vehicle. While lenders may levy prepayment charges and penalties on this, it is still quite beneficial due to the significant savings you make on total interest paid. Clearing your car loan, either in full or in part, earlier than its tenure can be a part of your responsible financial planning. Once you free up funds here, you can move on to other ventures. With Mahindra Finance, applying for and getting car loans approved is faster than ever. Charges for car loan pre-closure are also kept within the competitive market rates.

FAQs on Car Loan Prepayment

Q1. Is it wise to prepay a car loan early?

Generally, yes, if you have surplus funds and no higher-interest debt. Prepaying a car loan saves interest costs and provides peace of mind. However, ensure you maintain an adequate emergency fund (3-6 months of expenses) before making large prepayments. If your car loan interest rate is lower than potential investment returns, consider investing instead. 

Q2. How can I avoid prepayment penalties on my car loan?

To avoid car loan prepayment penalties, make sure to review and understand the loan agreement thoroughly.

Q3. Are there any situations where prepayment might not be beneficial?

Yes. For instance, if you have a low-interest car loan, you can put the extra funds into other investments for better gain than prepaying the car loan. So, a car loan prepayment may not be as beneficial in this case.

Q4. What documents do I need to prepay my car loan?

Typically required documents include: original loan agreement, identity proof (PAN card, Aadhaar), address proof, bank statements, and a prepayment application form. For full prepayment, you’ll also need to submit post-dated cheques if any remain unused. Contact your lender for their specific document checklist. 

Q5. Can prepaying my car loan affect my credit score?

Prepaying your car loan may have both negative and positive impacts on your credit score. Prepaying may indicate responsible financial behaviour, which can have a positive impact. On the other hand, it can also mean a reduced credit utilisation ratio and credit history, which may slightly reduce your credit score.