Tired of making car loan payments every month? Want to own your vehicle and free up some extra cash in your budget? We're right there with you. When the finishing line to paying off a car loan seems far from sight, you've got to wonder if there's a way to pay off your car loan faster. That's why we've created this guide with some tips and strategies you can use to pay off your auto loan faster to finally own your vehicle.
Is Paying Off Your Auto Loan Early Worth The Effort?
When you've set your mind to paying off your car loan early, you'll likely have to face sticking to a consistent financial routine and possibly sacrificing some money in certain areas in your life for the time being. If you're wondering if the effort your put in will be worth it, it's helpful to know what benefits and gains you'll get from clearing your debt. So here's a list of exactly what you'll gain:
- Extra money from saving on the amount of interest you'd have to pay
- Lower monthly payments, letting you have extra cash in other areas in your life
- Better credit score and credit utilization ratio when you reduce your debt-to-income ratio
- Being the sole owner of your ride, which, let's face it, feels pretty darn good
If you're ready to enjoy these sweet benefits, let's dive into what you can do to pay off your auto loan debt faster.
Things To Note
Before you start paying off your car loan early, you've got to take note of some important things that may affect your repayment goals.
Budget Constraints: Paying off a car loan early can put a strain on your budget if you don’t have the extra money to make the larger payments.
Prepayment penalties: Some lenders may charge prepayment penalties for paying off a loan early, so be sure to check your loan agreement before making any additional payments.
Loss of liquidity: Paying off a car loan early can mean that you lose out on potential investments or other opportunities because you no longer have access to the funds.
Make 2 Payments A Month Instead Of 1
Here's a neat and sustainable way to pay off your car loan faster if your on a loan that doesn't have any prepayment penalties. Every year you make 12 payments towards your car loan. If you adjust your repayment routine to make your half of your loan payments every two weeks instead of a full payment every month, you'll be able to make 13 full monthly payments within a year.
Now hear me out, I know you may think an additional month's payment may not be worth the change, but take a look at this case study below:
- Jack went to the dealership and got an auto loan with an 8% interest rate, and a 5-year loan term. The total amount was $20,000 and the dealer suggested that Jack make monthly payments of $372.
- But – Jack had heard that making bi-weekly payments instead of monthly payments can help him save money, so he made bi-weekly payments of $186 instead to pay more towards his principal loan.
- By making bi-weekly payments instead of regular monthly payments, he saved a whopping $561.17 in interest charges over the life of his entire loan.
Let's also take into consideration that for Jack to save $567.17, all he had to do was carve out an additional $93 to fulfil his bi-weekly payments on months that had 5 weeks – that's 4 our of 12 months in a year.
A simple way to pay off your car loan faster instantly is to review the add-ons you've already got. When you remove unnecessary add-ons your auto loan will be less, allowing your monthly payments to cover more of your principal balance. So while it may not be everyone's opinion, here are some add-ons I believe are nice to have – but aren't entirely necessary:
- Extended Warranties
- Gap Insurances
- Credit Life & Disability Insurance
- Roadside Assistance
Pay More Than The Minimum By Rounding Up
Another low maintenance method you can try is by paying more than the minimum by just rounding up your monthly payment. Let's say your minimum monthly payment is $350. If you round up your payments by just $50, you'll be making payments of $400 each month. By doing this you'll be making extra payments to the principal of the loan each year, which can add up to significant savings in interest!
And again, be sure to check whether your loan has a prepayment penalty clause whenever you make additional payments to your loan balance to avoid additional fees!
Make A Lump Sum Payment
If you've got a significant amount of money that doesn't have a home, consider putting it towards your car's personal loan! Doing this can get you a shorter term on your car debt and save you money on interest!
Refinance Your Car Loan For A Better One
Sometimes loan interest rates just don't cut us any slack. If you're getting your monthly income changes for worse and your financial situation's getting tight, it's time to consider refinancing your current auto loan.
When you refinance, you can negotiate for a lower interest rate orshorter loan schedule which will make it easier to pay off your loan faster. This method works best if you've got a good credit score and have made timely payments on your current loan. Additionally, some lenders offer incentives for early repayment, so be sure to check with them before making any extra payments.
Another option is to look into debt consolidation loans. These are loans that allow you to combine multiple debts into one single payment with a lower interest rate. This can help simplify the repayment process and make it easier for you to manage all of your debts in one place.
Find Extra Money In Your Existing Budget
Where there's a will, there's a way. And that way might just be staring you in the face from your monthly expenses. If you're serious about paying off your car loan faster, taking a look at how you're spending your money every month is going to help you a ton. Looking at your monthly budget can help you find expenses that you can cut back on or reallocate towards your financial goals. You can make small sacrifices in other areas of your life, like cutting back on eating out or canceling that expensive gym membership to reach your goal faster!
Paying off your car loan faster is possible if you're willing to make a few changes and sacrifices. Whether it's reviewing your add-ons, making extra payments, refinancing for a better loan, or finding extra money in your existing budget – there are plenty of ways to get ahead on your car loan payments. With some dedication and hard work, you can be debt free in no time!