How to Pay Off Your Car Loan Faster
Paying off your car loan faster can save you money in the long run, but it can also seem impossible. After all, you might be spending a good chunk of your paycheck each month on a car payment, so how can you pay off your car faster?
Before answering, you need to review your loan terms. What is the minimum you need to pay each month? Is there an early payoff or prepayment penalty? If there is a prepayment penalty, it might not make sense to pay off early, unless it’s a high-payment, high-interest loan and the penalty will end up being less than you would pay in interest. Most loans, however, do allow for paying off early without any penalties.
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Pay Bi-Weekly Instead of Monthly
There’s two major benefits of splitting your monthly payment in half and paying twice each month: Interest, and an extra payment.
Thanks to the magic of math, 26 half payments instead of 12 full over 52 weeks in a year will result in one extra full payment than if you you paid monthly. This only works if you pay every two weeks, not just twice a month. As an added bonus, because of the extra payment, you could shave time off your loan.
Second, your interest will go down. Because your payments happen more often, there’s less total principal to pay, which the interest is based on.
Round Up Your Payments
Got an extra $20 or $30 you can pay per month? Round up your payments. If your normal payment is $275, pay the extra $25 to make it an even $300. It’s likely not enough to really miss each month. Do the math, and it’s worth it – at that rate, it’s an extra $300 you are paying per year, meaning essentially one more entire payment. The more you pay, the more it compounds. Like bi-weekly payments, this will also reduce the amount of interest you will have to pay over the term of the loan.
Pay Extra Principal
Just sold off part of your record collection you don’t listen to anymore? Got a tax return or bonus at work? Use it to pay off extra principal. This will affect your overall interest, bringing down the total you owe. A great way to do this is after you get a raise at work. Since you are already used to living on your previous salary, put the difference between your old salary and your new towards your loan.
Adjust Your Budget
In a similar vein, see where you can cut something from your budget. Skipped a couple trips to Starbucks? Use that money to pay off your car. It may not seem like much — a few dollars here, a $10 bill there — but it adds up over time. Just like the other strategies, that means less interest, and it will take less time to pay off the loan, or at least paying less overall.
Or, if you have smaller loans, also causing you interest, pay the small loans down first. Use the money you were previously paying that loan to put towards the next loan. This is known as the Snowball Method of paying off loans. Once a few smaller loans are gone, you can start putting all the money you used to pay off other loans to pay off your car loan. If, for example, you pay off two loans, which you paid $100 and $200 each month towards, you now have $300 freed up each month to put towards your car loan.
Take Advantage of Discounts
Your lender may offer discounts. They may require you to sign up for automatic payments — a good idea anyway — or turning on paperless statements. The lender doesn’t have to waste paper, or worry about you making a late payment, and will knock off a bit from your interest rate. Ask your lender if they offer any other types of discounts, and take advantage of those.
Consider Refinancing Your Car Loan
Just like your mortgage, you can refinance your car loan. This means changing the interest rate if your credit score has improved since you initially took out your loan. With less interest to pay, your car payments will go more towards the principal, and pay off your loan faster. This will save you money, as you aren’t paying as much overall, thanks to less interest.
You might also be able to change the term of the loan – how long the loan lasts. If you get a lower interest rate, but a longer loan term, you are are back at square one. You will pay less per month, but still about the same over the longer term, again thanks to interest. This does not pay off your loan faster. Getting a lower interest rate, and keeping the same term, is good, but refinancing with a better interest rate and shorter term is the best case scenario.
Paying off your car loan faster is not easy. It requires either a good credit score, or adjusting your budget and spending habits. However, paying off your car loan faster will result in more money staying in your wallet in the long run, and is worth looking into — especially if you have a high-interest loan.
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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42