If you’re paying hundreds or thousands of Dirhams in interest on your car loan, paying it off early can be a smart move. This not only saves you money but also helps you become debt-free sooner, leaving your cash free for investment and other expenses.
For those wondering how to foreclose a car loan in the UAE, there are several important aspects to consider — the possible ways to settle early, penalties by the lender, terms and conditions, and more.
Let’s understand this concept better, the steps involved in the same, things to keep in mind, and more.
Overview — Foreclosed Car Loan in the UAEForeclosing a car loan simply means repaying the remaining balance in full before the end of your repayment tenure. Many car owners choose this route when they get extra funds or simply want to avoid long-term interest payments. In the UAE, auto loans typically have a maximum tenure of 5 years. Instead of paying monthly EMIs over time, foreclosure allows you to settle the entire amount early. While this frees your income from the recurring burden of instalments, you still need to keep a few points in mind. |
Yes, settling auto loans early is possible with various banks and financial institutions in the UAE. The only caveat here is that a fee is usually charged for such foreclosure. Known as ‘early loan settlement’ fees, it is typically around 1% of the outstanding loan amount.
While this might sound like an extra expense, with smart financial planning, early repayment can help you clear your debt faster. It can also bring additional benefits such as the full ownership of your car, savings on interest, an improved credit Score, and overall peace of mind.
With that clear, we will take a look at some tactics to foreclose an auto loan —
With these strategies, you can easily settle a car loan —
Refinancing is a great option to pay off your loan faster. It requires you to apply for a new loan, which has lower interest rates than the current one. If approved, the lender will pay off your existing debt — you can start repaying the new lender at a lower interest rate than before.
With the refinancing option, you can keep the unchanged repayment schedule, shorten the tenure, or reduce the monthly payments with an extended loan term. However, it’s worth noting that refinancing is a better option only if you are able to get a new loan at a lower interest rate than that of the original financing. This, in turn, is usually possible when you improve your credit score from the earlier period.
You can make biweekly payments instead of a large monthly EMI to pay a car loan early. By making half of your monthly payment every two weeks, you ultimately make 26 half-payments, or 13 full payments annually.
With this, you can make one extra payment each year that goes directly toward the loan principal. This, expectedly, helps in reducing the overall interest and loan tenure.
You can also make a large payment once a year or at certain intervals. Whenever you have access to extra funds such as a bonus, cash gifts, or side income, you can make a lump sum payment toward your loan principal.
While this may have sounded insignificant, it’s not the case — even occasional large payments can drastically cut down the interest you pay over time and help you become debt-free sooner. Additionally, this can help you avoid financial stress to a great extent.
Another easy yet effective strategy is to round off your monthly payments to shorten the loan tenure. For instance, if your EMI is around AED 876, consider paying AED 900 or AED 1,000 instead.
The extra amount, though small, goes toward reducing your principal and gradually shortens your loan term. With this, you not only save on the interest but also repay the loan faster without burdening your wallet.
Reevaluate your monthly budget and identify non-essential expenses that you can trim to pay off your debt faster. For this, you can create a budgeting strategy — limiting your frequency of dining out, subscriptions, impulse purchases, and more.
Furthermore, you can increase your income by doing some part-time gigs along with your regular job. Your earnings on top of your regular income can all be used to clear off your loan.
Here are the pros and cons of paying off your car loan early —
Pros | Cons |
---|---|
🟢You can save more on interest rates 🟢Enjoy early ownership of your car 🟢Relieves financial stress 🟢You can invest and save money |
🔴You may need to pay the early settlement fees for early repayment 🔴Your credit score may drop temporarily 🔴Aggressively repaying may affect your ability to handle emergencies 🔴You could use the money to grow your wealth instead of paying off the loan early |
Before you start thinking about how to foreclose a car loan, you should first assess your financial situation and determine which option is best for you. If you are financially ready to close your existing loan, you can select the best strategy from the options listed above.
Furthermore, check with your lender about any prepayment terms or early settlements. This will give you more clarity and make the foreclosure process smoother.
Ans: Most lenders charge an early loan settlement fee, which is around 1% of the outstanding amount. For more clarity, it’s advisable to check the loan agreement or contact your lender.
Ans: You can take steps like making extra payments, refinancing your loan, creating a strategic budget, and more to pay off your auto loan faster.
Ans: If you don't repay your auto loan, the lender may file a lawsuit against you. This can lead to the confiscation of your car as well as a drop in your credit score, making it difficult to get better financing terms in the future.
Ans: No, paying off your car loan early might slightly lower your credit score for a short time. However, this is mostly temporary and can be fixed quickly with good credit habits.