A car loan is a popular way to finance a car because it's convenient and affordable. At the same time, it's always a great day when you finish paying off your loan so you own your car outright and don't have any more monthly payments.
If you can pay off your car loan early, you'll also save on interest. Read on for simple tips and tricks to help you reach your goal faster.
Before you start looking at ways to pay off your car loan early, it's a good idea to check these details:
Is there any prepayment penalty for paying your loan off sooner than planned?
If you make extra payments, will the money go toward your principal or only toward interest?
Use an auto loan calculator to see how much you'll benefit by making any changes, and decide if it's worth it.
Keep in mind that paying your car loan off early may take some effort in the short term but will likely be worth it in the long run when your credit score gets a boost.
1. Pay Early Each Month
Paying early each month may mean more of your monthly payment goes toward your principal and less toward interest. This is because most car loans come with simple interest, which is calculated on the number of days between your payments.
Here's how car loans and simple interest work:
To make budgeting easy, your monthly car payment is always the same – but the portion that goes toward the principal vs. the portion that goes toward interest is different.
At the beginning of your loan, you'll pay more on interest and less on your principal because the amount of interest you owe goes down as you pay off your principal.
In addition, a simple interest rate is based on how many days have gone by between your payments.
So if you make your payment sooner than the due date some months, you'll be charged interest on fewer days.
2. Pay Extra Each Month
If you can manage to pay a few extra dollars each month, it will add up to hundreds over several years, which means you'll be able to pay off your car loan early and save on interest.
One easy way to pay extra is to round up your payment and here's how to do it:
Let's say your monthly car payment is $237.25.
Chances are, you won't miss paying an extra $2.75 to make your payment an even $240.
Better yet, pay an extra $12.75 for a nice even payment of $250.
This will add up to a total of $153 extra per year, which could mean you pay your loan off a few months sooner than planned.
3. Add a Lump Sum When You Have Extra Cash
Everyone dreams of winning the lottery or inheriting a ton of money from a mystery aunt. Though this may never happen, there might be one or two times a year when you do have a bit of extra cash.
Putting down a sum of money on your loan is a great way to pay off a car loan early so you can focus on other projects. Here are some ideas to get you started:
Put a portion of your tax refund onto your car loan.
If you get a raise, keep aside the extra money from one or two paychecks then put it on your loan.
Save up any windfalls through bonuses or dividends and use the money to pay down your loan at the end of the year.
If you sell your house or access home equity, reserve some of the funds for your car loan – or even pay it off in full.
4. Don't Skip Payments
Many lenders allow you to skip your payment from time to time, without penalties. While this is a helpful service for months when you might be short on cash, skipping payments means you'll end up with a longer loan term and you'll pay more interest.
If you find you can't make your payment one month, try these ideas:
See if you can borrow the money from a family member.
Put your car payment on a low-interest credit card.
Take out a low-interest personal loan to get you through the difficult spot.
5. Make Payments Every Two Weeks If Possible
Of course, there are 12 months in the year, which equals 12 monthly payments on your car loan. But did you know that if you pay every two weeks, you will make 26 payments rather than 24?
Over a long-term car loan, that will mean you pay it off a few months sooner, saving on all that interest.
This arrangement could be especially helpful if your employer pays you every two weeks, so talk to your financial advisor and see if it's possible at your local credit union or other financial institution.
6. Refinance Your Car Loan
A car loan refinance means taking out a whole new loan, so it's probably not worth it if your loan has a competitive annual percentage rate (APR) and you're happy with your monthly payment and term.
But here are a few situations where a refinance might be a good choice:
If interest rates have significantly fallen since you took out your loan, you could get a lower APR, which would mean more of your payment goes on your principal so you'll pay off your loan faster.
If your income has gone up, you may be able to afford a higher monthly payment.
On the other hand, if your income has gone down, you could refinance and get a longer term so your monthly payment is more affordable. Though this means you'll pay more total interest, it could be worth it for peace of mind each month.
Pay Off Your Car Loan Early With a New Car Loan
Buying a car is exciting and maybe you were so excited about choosing your vehicle that you didn't have time to do your homework.
If you got your car loan from a dealership or major financial institution, you might not have gotten the rates you deserve. Alternatively, maybe you want to tweak your loan term to pay off your car loan early.
Whatever your situation, click below to find out the next steps to get you a great new car loan!
HOW TO REFINANCE A CAR LOAN