Whether you just got handed the keys or you’ve been driving your car for years, car payments can be a universal part of owning your vehicle. Like other expenses, there are a variety of benefits to making your car payments on time.
Avoiding fees
Making your payments on time can help you avoid charges like late fees. These fees can vary based on your contract terms, and you should check your contract for payment guidance. Many finance companies will offer a payment grace period after your due date, but don’t assume this is the case.
If you make your payment after the grace period, your creditor may charge you around $25 to $50 on top of your payment as a late fee. This late payment will be reflected on your credit report, but a late payment is better than avoiding your payments entirely. If you’re worried your payment might be late, call your servicer or finance company and talk over what options are available.
Building equity
As you pay off your car, you’re building equity in your vehicle as an asset (aka something you own). Similar to home equity, your car equity represents the value of the vehicle above the amount you owe on it. But if you take good care of your vehicle and are consistent about making your payments, you may be able to recoup some of the cost later if and when you decide to sell your car.
Building good credit
Regular, ongoing, on-time payments on your car not only lower your outstanding balance but also help you establish a strong credit history and may help to boost your credit score.
Focusing on other debts
If you’re considering paying off your car entirely — or thinking about putting a little extra toward your payments each month — be sure to take stock of your full debt landscape first. Your car’s finance charges, or the percentage of your outstanding balance you pay in interest each month, can help you determine where to put your money. Depending on your car financing charges, you might want to focus on paying down other debts with higher annual percentage rates. Allocating money toward higher-interest debt instead of paying off your car could help you save in the long run.
How to pay
Car payments can be a sizable amount of your monthly expenses, so creating a mindful budget can go a long way in ensuring you’re able to make your payments in full. Using a tool, like spending buckets in an Ally Bank Spending Account can help you set aside the right amount of money each month to help avoid late or missed payments.
If your credit has improved or consumer interest rates have dropped, you can also consider refinancing your car. Like a home refinance, this will allow you to secure a new car payment with an updated interest rate or loan term. If you choose a term that is longer than what remains on your existing auto financing, you'll pay interest over a longer period, which could make the overall cost of your payment higher — just be mindful of any associated refinancing fees with your new lender.
