Are you tired of paying your car loan?
You’re not alone. Many people are looking for the best way to pay off their car loans faster, and we can help. We have a list of the best strategies to save you money and get you out of debt sooner. All it takes is some planning and discipline on your part, but it will be worth it in the end!
If you want to learn how to pay off your car loan faster, this guide is for you. We’ll cover all sorts of tips, such as refinancing and budget planning to name a few. There are even some tricks that most people don’t know about, which could save them thousands over time!
If you want to get rid of the high interest rate you are paying on your car loan and are looking for a great way to pay off your car loan faster, continue reading our guide.
7 Tips to Paying Your Car Loan Off Faster
Pay your monthly loan payment twice a month
If you would like to ramp up your car loan payoff process, we advise you to make biweekly payments. This means instead of sending in one monthly payment every month, break it down and send half the amount every two weeks.
For instance, if you borrowed $15,000 at 9% interest on a five-year term, you would owe $16,721.30 at the end of 60 months. By paying half your payment every two weeks instead of once monthly for five years, that will drop to just $14,481.25! That’s not bad, considering what you do is simply cut up the check in two.
Round-Up Your Payment
Another way to save interest and pay off your car loan faster is to round up every time you make payment. That means instead of sending in a payment of $279.86, send in $285 just to shave a little bit of the principal off the balance.
While this does not seem as much, it will save you a considerable amount in interest over five years. For instance, if you were to round up your payment every month for the first two years, that would save you $2,512.18 in interest and pay off your loan around month 24 instead of month 27.
Make One Large Payment Per Year
If you have an extra $5,000 available every year, why not beef up your car loan payment?
Sending in one large lump-sum payment per year or extra payments will reduce the term of your loan by a considerable amount. Prior to doing this, you’ll need to assess your financial situation. This is only a good idea if you can afford to do this without jeopardizing paying your other bills in the long run.
For instance, sending in just an extra $2,500 during the first half of the year would reduce the loan term by six months.
Make One Large Payment Over the Life of the Loan
An even more powerful advantage of this strategy is that you might be able to reduce the total interest paid on your car loan by a considerable amount.
Because each time you make a large payment, it will push down the overall balance of your loan, resulting in less interest being calculated and charged off over time.
If you can manage to send in a $10,000 payment during the 60th month of your loan term, you would save an extra $3,450 in interest and pay off your car two months early.
Do Not Skip Any Payments
One of the worst things you can do regarding your auto loan is to miss a monthly payment. That will result in a penalty fee from the bank, and it will also affect your credit score.
In addition, when missing a payment, many people assume that they have just one more month to pay off their car loan balance. Unfortunately, this is not the case! Lenders will add a late charge onto your next monthly payment, which may extend the overall length of the car loan.
We suggest that you never skip a monthly car payment unless there is some sort of emergency, such as losing your job or getting sick. By doing so, you could pay more in total interest, and your car loan could be paid off even later.
Snowball your Debt Payments
One of the most popular ways to pay down debt is by using a snowball method. Your first step should be to make sure that you have enough money set aside every month just for debt payments.
Next, arrange your debts from smallest – to largest by balance, so there’s no confusion on what goes where in this process. these debts include student loans, credit cards, personal loans or any other debt from a financial institution. Even if the interest rates are higher on the other debts, focus on the smallest balance first.
Pay the minimum payment from the smallest debt, plus whatever you have left over after paying your other minimum payment debt obligations from your monthly budget.
Eventually, with your other debts paid, you’ll be able to focus on your car loan amount and contribute more per month/year as we discussed above.
Refinance Your Loan
The only reason you should ever consider refinancing your car loan is to get a better rate or term.
For instance, let’s say that you have $18,000 worth of debt at 10% interest, and through using a debt snowball plan, you have reduced that balance to $12,000. And let’s say during this time, your credit score has improved, and you can get a lower interest rate to refinance the remaining balance.
If you were to refinance the car loan to 5% interest instead of 10%, you would save yourself almost $3,000 in interest by getting the best rate.
If you can find a lender that will refinance your car loan for 5% interest and reduce the term by three years, you would save yourself $5,362.64 in total interest payments with a possible lower monthly payment.
Does Paying Off your Car Loan Early Impact Your Credit Score?
Since paying off your car loan early will reduce the overall amount of time that your debt is “active” on your credit reports, it will improve your credit score.
Based on research, the longer your debt is around, even if you are current on making all payments, the more negatively it will impact your credit score.
Lenders view loans that have been paid off in a short time frame better than loans that have been paid down slowly. That’s because creditors feel like they have been paid back faster, and as a result, they are less likely to be as concerned about your ability to repay them in the future.
If you have a long history of making all of your car loan payments on time and reducing the principal every month, it will improve your credit score even more.
That said, according to Experian, once you pay your car loan off, you may see a temporary slight dip in your credit score.
If you have bad credit and are looking for ways to improve your credit, you may want to consider continuing your regular payments to demonstrate to any future lenders that you are responsible for paying your bills and have established a positive credit history.
Advantages to Paying Off Your Car Loan Faster
Aside from saving thousands in interest, there are several other advantages to paying off your car loan faster than the originally scheduled date.
Let’s take a look at some of these advantages:
- You will build up good credit for yourself in addition to improving your credit score.
- Since you will not have any monthly payments, you will have more money to put into savings or towards your next car.
- You will not have any large monthly payments looming over your head if something unexpected happens, such as job loss or illness.
- If you are able to save $2,000 on interest each time you pay off an additional $10,000 of your car loan, you will have an extra $20,000 in your pocket after four years. Who doesn’t like extra money?
- You will learn the discipline to save up for large purchases over time instead of overspending or financing everything.
Wrapping It Up
When it comes to car loans, there are a few things that you can do in order to pay them off faster. This article looked at several methods, including refinancing your loan, using a debt snowball plan, and making additional payments each month.
Now it’s up to you to put in the effort and see how many of these options are available for your needs to help with your car loan early payoff. However, before doing so, check to make sure your loan contract to see if it includes prepayment penalties. If there is a prepayment penalty, you’ll need to factor this in your calculation.
Just remember, once you are done paying off your car loan early, you will extra cash for next month’s payment or towards another financial goal. The amount of interest you would have paid can be turned into other debts or investments.
If you have poor credit and are improving your score, consider continuing the loan to demonstrate good credit management.