How to Pay Off Your Car Loan Faster: 11 Hacks For Successful Payoff
As lenders are making car loans accessible to more borrowers, the terms of the loan can stretch as long as eighty-four months, which can stick borrowers with a car payment for up to seven years. A lengthy loan can wrack up a significant amount of interest, so paying it off early can save money and take a costly item off your monthly budget.
Here’s how to pay off your car loan faster
Determining what you owe, looking at your options for loan repayment, and finding ways to pay more toward your loan can all contribute to a quicker repayment.
Determine your current balance and payoff penalties
The first step to determining how to pay off your car loan faster is to look at the details of your loan. Some lenders make it difficult to pay off car loans early because they will receive less payment in interest. In the best-case scenario, your loan was calculated using simple interest, which means your monthly interest payment is based on your loan’s outstanding balance. That means that if you pay off the loan early, you’ll make fewer interest payments.
If your lender does allow early payoff, ask whether there is a prepayment penalty. Some lenders do impose a fee for early payoff, which could reduce any interest savings you’d gain by paying off the loan early.
Lastly, check your balance and make sure that any extra payments go toward the principal of the loan. Some financial institutions will automatically apply additional payments toward interest or other fees rather than toward reducing the principal.
Calculate how much you will save:
After you’ve figured out how much you owe and whether your lender will impose prepayment penalties, use an auto loan calculator to determine how much you’ll save in interest payments if you pay the loan off early. If there are prepayment penalties, they could negate any savings.
Even if your calculations show minimal savings for early loan payoff, you may find other benefits that make it worth your while. For example, eliminating your loan through early payoff could help your credit score and free up money in your monthly budget.
Consider refinancing your current car loan
If your car loan came with a high interest rate or other monthly fees, refinancing your auto loan could provide you with better terms and a lower payment if your credit score has increased since you applied for the loan, which is likely if you’ve been making monthly payments in full and on time.
As you look at options for refinancing, keep in mind that your goal is to pay off the loan quickly. Refinancing with a new 60-month loan might stretch out your payments even longer, so you’ll want to look at shorter terms and a lower interest rate. If you do refinance for a long-term loan, consider overpaying each month to pay off the loan more quickly.
Find out how much you may save by refinancing
Banks, credit unions, and online financial institutions such as LendingTree can connect you with available terms and interest rates for refinanced car loans.
Pursue methods to pay down the principal
If you have a simple-interest loan, you can pay it off more quickly by making additional payments toward the principal. Because you’ll pay off the principal faster, you’ll also pay less interest and reduce the overall cost of the loan.
Some lenders can make this transaction difficult, so before you send extra payments talk to the lender’s customer service representative about how to make a principal-only payment. This will ensure that your payment won’t go toward fees or interest.
Here’s how to pay off your car loan faster by making extra payments toward your principal balance.
Make bi-weekly payments:
If you change the frequency of your payment to every two weeks, you will make an extra payment every year.
Here’s how it works. Divide your monthly car payment in half, and make that payment every two weeks. You’ll be paying 50 percent of your payment twenty-six times a year, which works out to thirteen monthly payments over twelve months.
This technique also will reduce your interest payments over the life of the loan, as you are decreasing your remaining balance at a faster rate.
Round up your car loan payments:
Another way to slightly increase your payment schedule is to round up your payment to the nearest $50. For example, if you borrowed $13,000 at a 5 percent interest rate for seventy-two months, your monthly payment is $209. On a regular payment schedule, you will pay $2,074 in interest over the life of the loan.
If you round that payment up to $250, you will pay the loan off thirteen months earlier and save $395 in interest.
Find extra money
Another way to pay off your car loan faster is to put any extra money you can find or earn toward your car loan. Here are some ideas:
Snowball your debt payments:
This approach can help you pay off all of your debts, including your car loan.
First, pay all the money you can toward your smallest debt or highest-interest debt until it’s paid off. Then, apply the money you were paying toward that debt to your next largest debt, and continue the pattern once that debt is paid.
The longer you make snowball payments, the more effectively you will pay off debt. The key to success is to stay disciplined in making payments and resist taking on new debt during this period.
Utilize tax refunds, bonuses, and pay raises:
While putting tax refunds, bonuses, and pay raises toward your car loan may seem painful now, in the long run paying off your car loan faster will free up your budget for more enjoyable expenditures such as vacations and eating out in the future.
Applying pay raises to car loan payments is an especially effective method of paying down a car loan. Pay raises typically don’t result in a large increase per paycheck, and you easily could apply that small amount of extra cash toward your loan. Over time, it will help bring down your car loan balance more quickly and you’ll never miss the money.
Earn additional income:
If you can’t find extra cash to put toward your car loan, try earning some extra income in your free time with non-conventional jobs. You can rent out a room in your house, do yard work for friends and neighbors, sell items at a yard sale or online, or house and pet sit. Applying all your extra earnings toward your car loan will chip away at the balance.
Reduce extra expenses:
Temporarily cutting out other monthly budget items also can free up cash that you can add to your monthly car payment. Can you go without cable or a landline or decrease your data plan on your cell phone? Reducing your restaurant and entertainment budget or foregoing new clothes or other items for a year or two can help you pay off your car loan quickly.
Paying down a car loan takes time and discipline. However, when you commit to cutting expenses and putting all extra income toward a car loan principal, you’ll soon find yourself free of auto loan debt.