Can I Make Extra Repayments On My Car Loan?

Our comprehensive guide to find out if some car loans restrict you making extra repayments to pay out the loan early.

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, updated on July 5th, 2023       

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Making extra repayments on your car loan to pay off your loan early is a good strategy to reduce the overall interest you pay on your loan. However, some loan products will penalise or restrict customers from making extra repayments on their car loans, especially in lump sums earlier on in the loan term.

This is because the interest on your loan is how the bank or lender makes money, and forgoing that interest means the bank is not making as much profit on the loan. Variable rate car loans more often allow for extra repayments than fixed rate loans; some may allow full repayment before the term is up. Other strategies for repaying your loan early are to opt for fortnightly or weekly repayments over monthly repayments.

Fixed vs. variable loans – why variable loans are “repayment” friendly

Variable car loans are a type of loan where the interest rate can go up or down depending on the marketplace. All types of loans, from credit cards to mortgages, are tied to what’s known as the RBA cash rate. If the cash rate goes up, loans become more expensive and attract more interest. When the opposite happens, loans are cheaper. A variable rate loan is sensitive to these changes and repayments can go up or down along with this cash rate, among other factors.

Since variable interest rates have no fixed repayment amounts, lenders and banks are more forgiving when it comes to paying off a loan early. The bank or lender itself cannot predict whether the loan will generate more profit (going from low to high) or a loss (going from high to low) and will not penalise customers with fees or extra charges. Lenders also give some consumers the option to redraw from the loan; this means paying back more in interest as time goes on as the principal will increase mid-way through the loan term.

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The facts about extra repayments on car loans

Why fees and charges apply for extra repayments

Lending out money for customers to buy cars and other property is how banks and lenders make their money. They make their money through interest payments and other fees and charges, such as establishment fees or account keeping fees. If a customer takes out a $20,000 loan for five years with an interest rate of 8.99% p.a., the bank or lender is expecting to make at least $4,904 in interest to make a profit on lending out the money.

Let’s say a customer nets a massive bonus at work or a pay rise and manages to pay off the loan in full at the two-year mark. The bank needs to recoup $1,988.15 in lost interest. In some instances, to soften the loss of profit, a bank or lender will charge a break fee. This is either a once-off payment or a percentage of the final balance.

Though this is good for the consumer, it could leave other consumers out in the cold if many people opted to pay out their loan early. Like any business, they want to maintain profit margins. In response to a rush on early repayments, banks may increase their interest rates or account keeping fees to keep profits at the same level.

Paying off your loan early can save you in interest and is only advisable if you are financially better off in comparison to paying off the loan within the allotted term.

Here are some strategies for paying off your loan early and what fees you may encounter by doing so.

Strategy 1: opting for fortnightly or weekly repayments over monthly

This strategy is the least risky for consumers and banks alike; the entity providing the car loan will allow you to choose your repayment period and thus not charge extra for paying off your car loan in fortnightly or weekly instalments.

Paying off your car loan fortnightly will take at least five months off your five-year loan term. This is because you are making 26 fortnightly repayments across a year, which equates to 13 equivalent monthly payments. With this method, you are paying off your car loan with “extra” month each year with fortnightly repayments. When it comes to weekly repayments, you are making 4.3 payments per month over a year period, which is also equivalent to 13 monthly repayments.

Note that some lenders may not allow weekly or fortnightly repayments, though this remains quite rare.

Strategy 2: making voluntary repayments above the repayment amount

The next strategy which may incur fees of some kind if you pay out the loan ahead of schedule is making voluntary fees over the repayment amount. Looking at the $20,000 loan example, paying off the monthly repayment of $415 per month means a total cost of $25,687 over five years and two months (including $10 monthly account keeping fee.) Upping this repayment to $500 per month ($85 voluntary) means a saving of $1,237 in interest and a reduced term of four years and one month. However, this may still come with restrictions such as a break fee.

Strategy 3: periodic lump-sum payments or total early repayment

If you have the cash on hand to pay out a loan in full before the loan term is up, especially if your car loan is a fixed rate loan, this will incur a break fee or penalty of some kind.

This can vary among lenders who may penalise you with a hefty fee if you pay off a loan in the first 12 months, while others may charge a flat fee. Others charge a percentage of the final loan amount. Some may not charge fees if your loan is close to the end of the term.

If you have a variable rate loan, many of these fees or charges do not apply. Some variable rate loans may offer a redraw facility, which means you can withdraw money from your loan to cover other purchases. This extends your loan term and amount owed, and of course, interest.

Making periodic lump-sum payments is like the voluntary repayment example; it can reduce your loan term and interest paid. Be careful when doing so; some lenders may charge a fee for large payments of this nature.

The do’s and don’ts of car loan early repayment

PROS

Opt for a variable rate loan. Variable rate car loans will allow you to make extra repayments without penalty.

Select weekly or fortnightly repayments instead of monthly, as you’ll get one “extra” repayment per year with no additional penalty.

CONS

Pay out your loan early (in the first half of the loan term) with a fixed rate car loan. It’s more than likely you will be penalised through fees.

Use your redraw facility, if you can avoid it. This will add extra principal to your loan and increase how much you pay in interest overall.

Answering your questions about extra repayments on car loans

What are extra repayments on a car loan?

Extra repayments on a car loan are repayments that a customer makes on top of what they’re expected to pay each month as set in the car loan contract. Paying extra into the loan per month can reduce interest paid on the loan and settle the loan earlier than the original loan term.

What’s better: monthly, fortnightly, or weekly repayments?

This is up to your budget and how you want to pay off your loan. The facts are that paying in weekly or fortnightly instalments can speed up your loan term, as you make more repayments in a calendar year compared with monthly repayments (13 “monthly” repayments per year instead of 12).

What is a break fee?

A break fee or an early termination fee is a charge levied when a customer pays out a loan ahead of the expected settlement date. These fees may be charged as a lump sum, a percentage of the final account balance, or some other pre-determined fee set out in the contract.

What is a redraw facility?

A redraw facility is the ability to withdraw money already paid into your loan to spend on other goods and services. This has the downside of adding more principal to your loan and more interest. Fees may also apply for drawing down on your loan.

What is a variable rate car loan? How is it different to a fixed rate car loan?

A variable rate car loan is a loan with an interest rate that can go up or down depending on the market. A fixed rate car loan does not change. This allows you to make equal repayments throughout the life of the loan. A variable rate car loan may have higher or lower repayments depending on the market. Variable rate car loans also allow you to make extra repayments for little or no fee.

What is a lump sum payment?

A lump sum payment is a substantial extra repayment that helps pay off your loan faster. Lump sums can also pay off your entire loan, if they are big enough.

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