How to Pay Off Your Car Loan Faster
If you want to know how to pay off a car loan faster, fortunately, there are plenty of options. But while you can pay off your car loan early, it’s not always the best financial choice.
Consider the various methods listed below for working toward an early payoff, as well as whether this move makes sense for you.
6 ways to pay off your car loan faster
If you want to pay off your loan early, here are six ways to make it happen:
1. Refinance your car loan
Refinancing your car loan involves taking out a new, more affordable loan and using it to pay off your original loan.
For instance, if you take out a new loan with a shorter repayment term, you’ll be able to pay off your car loan faster simply by making your payments on time. If that same refinance also has a lower interest rate, you may be able to make a car loan early payoff while keeping your monthly payment the same.
This method can be especially effective if your credit score has improved significantly since you first applied for the loan or market interest rates have gone down. Either way will allow you to secure a better interest rate.
However, be aware that refinancing also comes with upfront fees, so you’ll want to make sure you’re saving enough on interest charges to make up for the added costs.
You can use our auto loan calculator to see how your payment will go under various rates and loan terms.
2. Make biweekly payments
Paying off your car loan faster by making biweekly payments is also an option. If you decide to go this route, you would pay half the amount of your car payment every two weeks instead of making the full payment on a monthly basis.
Splitting them up in this way allows less interest to accrue between payments, but at the same time, you’ll end up putting more money toward paying down your principal loan balance.
Since a year is 52 weeks long, you’ll have made 13 total car payments by the end of the year by following a biweekly payment schedule, instead of 12 on a traditional monthly payment schedule. So if you can afford a biweekly payment, that extra month’s worth of funds will help you pay off your loan early.
Here’s a look at what a biweekly payment schedule could look like on a $10,000 auto loan with a 7% interest rate.
| Monthly payments | Biweekly payments | |
|---|---|---|
| Payment amount | $116 | $58 |
| Number of payments in a year | 12 | 26 |
| Total interest paid | $3,938 | $3,460 |
| Interest savings over the life of the loan | N/A | $478 |
| Number of months to pay off the loan | 121 | 108 |
3. Round up your payments
Depending on how much cash flow you have available to you, consider rounding up your payments to the next $50 or $100. You can pick the number based on how much disposable income you have left in your household budget at the end of the month.
If you round up your payments, you’ll be chipping away at your remaining balance faster. Just be sure to verify with your lender that the extra money you’re paying will go to paying off your principal loan balance rather than paying future interest charges.
For example, here’s what rounding up could look like if you have a $25,000 auto loan at a 7% interest rate and a five-year loan term:
| Monthly payment | Monthly payment +$50 | Monthly payment +$100 | |
|---|---|---|---|
| Total payment amount | $495 | $545 | $595 |
| Total interest paid | $4,701 | $4,179 | $3,762 |
| Interest savings over the life of the loan | N/A | $522 | $938 |
| Number of months to pay off the loan | 60 | 53 | 48 |
4. Put extra money toward a lump-sum payment
If you can’t afford to pay extra money toward your auto loan every month, consider doing so just whenever you have surplus funds on hand.
Windfalls, like your tax refund or a bonus at work, can go a long way toward paying off your auto loan early. Ideally (as with all of these examples), any amount of extra money that you pay should be applied to your principal balance to reduce the total amount that you owe.
Here’s an example of how an additional payment of $2,000 can help speed up your loan payoff if you have a $20,000 car loan at a 7% interest rate with a five-year loan term:
| Monthly payment | Monthly payment + $2,000 windfall | |
|---|---|---|
| Total monthly payment | $395 | $395 |
| One-time additional payment | N/A | $2,000 |
| Total interest paid | $3,761 | $2,991 |
| Interest savings over the life of the loan | N/A | $770 |
| Number of months to pay off the loan | 60 | 53 |
5. Continue making your monthly payments
Even if you’ve made a few extra car payments recently, you need to keep making your monthly payments as scheduled. This will keep interest from accruing unnecessarily and help you to continue reducing your principal balance, leading to an earlier payoff.
6. Opt out of any unneeded add-ons
Lastly, some of your loan repayments might be going to optional add-ons and dealer fees. You can review your loan agreement to see if you are paying for any of the following and then contact your dealer to cancel any unnecessary services.
- GAP insurance
- Service contract
- Extended warranty
- Tire and wheel warranty
- Exterior and interior maintenance package
If you decide to go this route, you’ll likely be refunded a prorated amount for any unused services. Instead of putting that money toward other expenses, consider using it to pay down your auto loan.
Signs it makes sense to pay off your car loan early
Now that you know how to pay off a car loan faster, it’s time to tackle the question of whether you really should pay off a car loan early.
The answer is going to depend on the specifics of your financial situation. However, here are some encouraging signs that you may be in good shape for an early payoff:
- You have extra cash: If you have some extra income on hand, paying off debt can be a great way to put that money to use. Just be sure to ensure your lender has the money applied to your principal balance, not your future interest charges.
- You want to be debt-free: Becoming debt-free is a goal for many. Achieving this can help reduce stress and put more money in your pocket long term. Plus, it can help you get credit in the future by improving your credit utilization ratio, your debt-to-income ratio or other metrics.
- Your interest rate is too high: Higher interest rates can make it a struggle to pay down your auto loan. As noted above, if your credit score has improved since you first took out your car loan, or if market rates have dropped, consider refinancing your loan. You can check your credit score for free with LendingTree Spring.
Signs not to pay off your car loan early
On the other hand, it doesn’t always make financial sense to pay off auto loans early. Here are some situations where you may be better off sticking to your original payment schedule:
- You have a prepayment penalty: As the name suggests, prepayment penalties are added fees that your lender charges you for paying off the loan early. Not every auto loan is subject to them, but it’s worth checking with your lender to see.
- You have other high-interest debt: The interest rate on auto loans is often affordable compared to other high-interest financial products, like credit cards. If you’re carrying around a lot of high-interest debt, it may make sense to use the debt avalanche method to pay down the debts that are costing you the most in interest charges first.
- You don’t have much debt: If you only owe a little debt, then making timely payments may actually be helping to boost your credit score. Meanwhile, closing an account can temporarily cause your score to drop. In this instance, it might be helpful to keep your account open so you can keep sending positive payment information to the credit bureaus.
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