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 96 months, which can stick borrowers with a car payment for up to eight years. A lengthy loan can rack up a significant amount of interest, so paying it off early can save money and take a costly item off your monthly budget.
- Determine your current balance and payoff penalties
- Consider refinancing your current car loan
- Pursue methods to pay down the principal
- Find extra money
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 in 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 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. You may have to specify that a transfer or a check is a “principal-only payment” so run it with your lender first.
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 off the loan 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 72-month loan is still a relatively long time, so you’ll want to look at shorter terms and a lower interest rate, say a 60-month loan or shorter, if possible. If you do refinance for a long-term loan, consider overpaying each month to pay off the loan more quickly.
Pursue methods to pay down the principal
As we’ve mentioned, 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 pay less interest and reduce the overall cost of the loan.
Here’s how to pay off your car loan faster by making extra payments toward your principal balance.
Make biweekly 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% of your payment 26 times a year, which works out to 13 monthly payments over 12 months.
This technique will also 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% interest rate for 72 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 at least 13 months earlier and save at least $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 in the future, like vacations and eating out.
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 nonconventional 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 also 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 cellphone? Reducing your restaurant and entertainment budget or forgoing new clothes or other items for a year or two can help you pay off your car loan quickly.
How paying off a car loan early affects your credit
Paying off your car loan completely could help or hurt your credit, depending on certain factors.
When paying off a car loan helps your credit
It could help when it improves your debt-to-income ratio (DTI). Lenders often look at DTI as a way to judge your ability to take on and pay off loans. Having a completed installment loan on your credit history could shine in your favor whenever you want to apply for another loan, such as a home mortgage.
When paying off a car loan could hurt your credit
It could hurt your credit score if you lack another type of open installment loan. Lenders tabulate open credit accounts as a greater positive toward your credit score than closed credit accounts. And without another installment loan, such as a mortgage, student loan or personal loan, you’ll limit your credit diversification. Even if your credit score dips slightly from paying off your car loan, it may be worth it if you have a high-interest loan. You could check your credit score here.