South Africans should try and use any extra money towards paying off their cars, even before starting to save towards another goal.
Capitec said that the interest rates on debt tend to be much higher than interest rates on savings accounts, so you could spend more on paying off interest in the long term than you would earn by saving.
“If you get a tax refund, a bonus at the end of the year or birthday money, put that extra income into your loan. Again, it will help you lower the overall repayment amount so that you pay less interest and shorten the term of your loan,” it said.
“Interest accumulates and compounds over time. If you can, pay your loan every 2 weeks instead of just once a month. You’ll save in the long run because the interest has less time to add up. First check with your credit provider if this is allowed.”
Below Capitec provided an example of a R100,000 vehicle loan with no deposit, and how much you can save by contributing more each month.
Ther terms of the loan are as followed:
- Loan amount – R100,000
- Interest rate – 12%
- Loan period – 5 years
- Monthly payment – R2,224.44
- Number of payments – 60
- Total interest – R33,466.69
- Savings – R0
|Terms||Paying R100 extra per month||Paying R500 extra per month|
|Monthly payments||R2 224.44||R2 224.44|
|Scheduled number of payments||60||60|
|Actual number of payments||57||46|
|Total amount of early payments||R5 700||R23 000|
|Total interest||R31 402.73||R25 227.54|
|Savings||R2 063.96||R8 239.15|
Capitec advised against skipping any payments as you will end up paying more on your car over the long term because of the interest you have to pay over and above the loan amount.
To avoid this, set up a debit order to pay your loan account as soon as your salary comes in, it said.
This way you also won’t be tempted to skip a payment to spend the money on something else.
It also warned that if you miss too many payments, your car could be repossessed, which could also damage your credit score.