Provided your lender doesn’t charge a prepayment penalty, paying off your car loan faster is a great way to save money. That means paying less interest — and when you’re done, you should have a few hundred dollars more in your budget each month.
Yet, getting there might be challenging. You may utilize a few strategies to pay off your debt quicker. Even if you can, your strategy may place you in a worse financial situation if you are not careful.
6 ways to pay off your car loan faster
There is no one way to pay off your auto loan early. In reality, it makes sense to take a different strategy. Once you have an idea of how much you could save You may use a few strategies to pay off your auto loan quicker.
1. Refinance with a new lender
Refinancing might be a simple solution to pay off your debt sooner. If you opt for a shorter loan term, you may be able to keep the same monthly payment — provided you score a lower interest rate. Even if you do not make additional payments or round up your installments, you will automatically pay off your automobile loan sooner.
2. Make biweekly payments
While it may not seem to be much, paying twice a month rather than once can bring you to the finish line sooner. It will also help save on interest . This is because interest will accumulate for a shorter period of time until you make a payment — and because you will constantly reduce your overall loan debt. It helps move you toward an early payoff date without significantly increasing the amount you put toward your loan each month.
3. Round your payments to the nearest hundred
Similarly, rounding up your payments will have a little monthly effect but a significant cumulative impact. You may gradually lower the principle of your auto loan by rounding up to the closest hundred, or at least the nearest full number. You will also get ahead of time, keeping you ahead of interest and easing you towards a quicker return.
4. Opt out of unnecessary add-ons
If you added optional protection like gap insurance, an extended warranty or a service contract to your loan, contact your provider and cancel them. You should get a prorated refund for the balance, as well as a reduction in your monthly payment. But rather than putting that refund into your pocket, apply it to your loan. You’ll owe less overall and get a lump sum payment this way.
5. Make a large additional payment
Tax returns, bonuses and other large lumps of cash can go to your car loan. Each time you can save a few hundred dollars on your principal, it’s probably worth it. Like rounding your payments and paying biweekly, it will prevent interest from adding up. When your loan total falls, more of your payment will be applied to principle, resulting in an early payback.
6. Pay each month
Even if you are ahead of schedule, you should still make your loan payments on time each month. This prevents interest from accumulating, which means more money goes toward principle, thus lowering the amount of interest you pay. Maintaining regular payments when they are not necessary can result in the early repayment of your auto loan.
When not to pay off your car loan early
Paying off your auto loan early saves you a few hundred dollars each month. But in some cases, you could negatively impact your finances more than help — so it may not always be the best move.
Avoid paying your loan off early if:
- There is a prepayment penalty. A prepayment penalty effectively penalizes you for making additional payments or paying off your debt in full early. It is an effort by the lender to make up for the interest you would have paid if you had kept on track. If there is a prepayment penalty, be sure it does not cost you more in interest than you would otherwise pay.
- Your loan uses precomputed interest . Precomputed interest front-loads the interest you pay each year so that the first month is worth more than the last. Paying off your loan early will not considerably reduce the cost of your auto loan. In this instance, sticking to the loan timeline may be preferable.
- You don’t have much debt. Although it may seem paradoxical, your credit score is determined by the sorts of debt you have and the amount of time you have had them. Since car loans are long-term debt, making consistent payments for years will help keep your credit score high.
One caveat: paying off your loan may lower your credit utilization ratio, which accounts for around 30 percent of your credit score. If you have additional obligations and a high debt-to-income ratio (DTI), closing one account should assist you improve your credit score.
Ways to lower your monthly car payment
Apart from refinancing your loan, you may minimize your monthly payments by deferring them or requesting a loan modification.
Deferment allows you to skip a payment if you are experiencing short-term financial hardship. Lenders may grant you one to three months of deferral to assist you. But deferment only moves the payments to the end of your loan, so you will still have to make them up eventually. You will also be liable for interest, making it more costly in the end.
While lenders may be less eager to adjust your loan, it never hurts to ask. Much like refinancing, loan modification will modify the terms of your loan by either extending the period or decreasing the interest rate. If you can get a modification to your loan, you could reduce your monthly payment without having to apply with a new lender.
Paying off your auto loan early may not always be the best option. If you’d face prepayment penalties or a potential hit to your credit score, the savings won’t be worth it.
But if you want to get out of debt, eliminating car payments is one of the quickest ways to make room in your budget. The greatest strategies to pay off your auto loan quicker include refinancing or just making more payments. Even if it’s just a few dollars more each month, you’ll minimize your debt and maybe shorten the term of your loan.
What is the fastest way to pay off your car loan?
How to Pay Off Your Car Loan Early
- PAY HALF YOUR MONTHLY PAYMENT EVERY TWO WEEKS. …
- ROUND UP. …
- MAKE ONE LARGE EXTRA PAYMENT PER YEAR. …
- THROUGHOUT THE TERM OF THE LOAN, MAKE AT LEAST ONE LARGE PAYMENT.
- NEVER SKIP PAYMENTS. …
- REFINANCE YOUR LOAN. …
- DON’T FORGET TO CHECK YOUR RATE.
Is it worth paying off car loan early?
Repaying a loan early usually means you won’t pay any more interest, but there could be an early prepayment fee. These fees may cost more than the interest you’ll pay throughout the life of the loan.
What happens if I pay extra on my car payment?
You’ll pay less interest overall.
Whether you have a 60-month, 72-month, or even 84-month vehicle loan, you will pay a lot of interest throughout the life of the loan. As long as your loan doesn’t have precomputed interest, paying extra can help reduce the total amount of interest you’ll pay.
Is it better to split car payment into two payments?
By paying half of your monthly payment every two weeks, your car loan company will get 13 monthly installments instead of 12. This simple technique can shave time off your auto loan and could save you hundreds or even thousands of dollars in interest.
Can you pay off a 72 month car loan early?
Is it possible to pay off a 72-month auto loan early? You can, in fact, pay off a 72- or 84-month vehicle loan early. Since these are long repayment terms, you could save considerable money by covering the interest related to a shorter period of time.
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Makenzie Berke is Interior Repair Manager at ColorProTech. He writes about technology, answer questions about car topics that people want to know