Hate being in debt? We all do. So, how can you pay off your car loan faster? The ability to do this depends on two factors: whether your lender charges penalties for payoff, and whether you can continually add to the principal amount. Paying off the principal will decrease any accrued interest rate, shorten your loan term and monthly payment, and help you own your car sooner.
How to Pay Off a Car Loan Faster
1. Do Extra Principal Only Payments. When you first established your car loan, you were aware of how much each monthly payment would be and what you could afford. While payments may appear to be set in stone, they are not.
Most simple-interest loans do not have a prepayment penalty. This allows people to pay the loan off quicker than the established term without additional charges. If you have extra funds and are able to increase your monthly budget, do so.
Principal-only payments can be made to pay the loan off quicker and helps to reduce the amount of interest that accrues over time. Monthly loans cover the principal balance with accrued interest. However, making at least one principal (loan amount) payment allows you to pay off just the loan amount with no accrued interest!
2. Contrast the Current Balance With Penalties for Payoff. Examine the details of the car loan payment. If your lender institutes a penalty for paying the loan off early, check the loan balance. Make sure extra payments go towards the principal. Some lenders automatically apply added payments to interest or fees rather than the principal balance.
You may need to specify the extra payment is going to the principal only. To do this, consult with your institution.
Also, calculate what the savings are to pay it off early. Use an auto loan calculator to determine how much you can save if the loan is paid early. A prepayment penalty can counter savings.
3. Make Payments Bi-Weekly. Experts advise splitting up payments into two bi-weekly payments may be to your advantage.
The first payment ends up paying more money down towards the principal while the second payment goes towards principal and interest. By engaging in this type of payment, people end up making 13 monthly payments over one year. Thus, reducing their overall interest, and adding an extra payment to their year.
4. Use Bonuses and Commissions Towards the Loan. If you receive a holiday bonus, engage in profit sharing, or have commissions, you may choose to make an extra payment on your car loan. While it may not be as exciting as a new purchase, it will take time off of the term of your loan.
5. Refinance to Receive a Lower Rate. If the loan is a high-interest loan or the percentages on loans have lowered, you may want to consider refinancing. This can end up saving you money and allow you to pay down the loan quicker.
This only works if your credit score is higher than it was when you previously applied. This will allow you to qualify to receive a lower rate and reduce monthly payments. The car loan can be repaid quicker as you will be able to pay more down on the principal every month.
6. Establish a Side-Business, Freelance, or Take an Extra Job. It can be for the short-term, temporary, or when you have some extra time. Extra income is very useful for paying off balances over a short duration.
7. Round Payments up to the Closest $50. If you are unable to pay additional money each month or year, you can at least decrease it- even if it isn’t much. Experts suggest that adding an additional $50 will shorten the loan by months or a year. Every little bit helps.
8. Cancel Extras. When the loan was first received, there may be some extras on your contract. These may include service contracts, extended warranties, GAP waivers, and warranties on wheels/tires. Unless you plan on using them, consider canceling what you do not benefit from. This will lower payments.
Should I Pay My Car Loan Off Early?
It depends on your situation. Sometimes, if there are no penalties, it can be advantageous to pay a car loan off early. It increases your credit score and is looked upon favorably by the credit bureaus. However, there are situations wherein you may want to save a bit of money each month and continue to make monthly payments.
Paying off a loan early will free up money for something else. This will allow you to make another purchase or save the amount you were using in a bank. Financially, it’s a good idea, but you will need to spend more money just to make this possible.
It means that in the short term, you may have less money to use. You may also need some money in the meantime if an emergency should arise. You need to decide if you want more money now or later.
Paying it off eliminates spending more on accrual of interest. Interest makes you actually pay more than the car was worth. By making larger payments or paying it off, you will avoid overpaying for your car. This is referred to as being “upside down.”
It also means that in the event of an accident, you may have to pay the rest of the bank loan unless you invest in GAP insurance.
In paying down a car loan faster, it is worthwhile to first determine if there is a penalty for early payout. Some companies don’t want to lose out on interest- it’s how they make their money. So, they instate a penalty for early payout.
If this is the case, you need to determine if it is worth it to pay it off completely or maintain the status quo and save money/apply it elsewhere. When it is advantageous, use these eight hacks to pay off your car loan earlier. Even though a few extra dollars may not seem like much, it does add up over time. It can mean a huge difference in when the vehicle is fully paid off.