You can pay off your car loan faster using several strategies, including refinancing your car loan, making biweekly payments, putting money toward extra lump-sum payments and canceling add-ons.
If youre anxious to remove your auto loan from your list of debts, there are ways to do it more quickly. You can pay off your car loan faster by increasing the size or frequency of your payments, refinancing the loan or limiting extra expenses that can increase the size of the loan.
Before deciding to pay your car loan off early, check whether youll be charged a prepayment penalty. That can affect whether and when its best to pay down your car loan aggressively. Also, make sure you have a sufficient emergency fund to cover costs should an unplanned expense arise.
Heres how to pay off your car loan faster, plus more on how to decide if its worth paying it off early.
Buying a new car can be an exciting experience. However, taking out an auto loan also means committing to years of monthly payments. If you want to pay off your car loan faster and own your vehicle outright sooner, there are several effective strategies you can use. Read on to learn more about the fastest ways to pay off a car loan.
Refinance Your Car Loan
One of the most effective ways to pay off a car loan faster is to refinance Refinancing involves taking out a new auto loan with better terms and using it to pay off your existing loan,
To get the most benefit you’ll want to refinance into a loan with a lower interest rate and/or shorter repayment term. Here’s a quick example
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Original Loan: $25,000 over 5 years at 6% APR
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Monthly Payment $530
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Interest Paid: $3,304
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Refinanced Loan: $25,000 over 3 years at 4% APR
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Monthly Payment: $753
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Interest Paid: $1,272
By refinancing into a shorter loan at a lower rate, you would pay off your loan 2 years faster and save $2,032 in interest charges. The faster repayment term leads to paying off the loan more quickly.
Refinancing makes the most sense if you initially got stuck with a high interest rate or long repayment term. It’s also a good option if your credit score has improved significantly since you first got the loan. The better your credit, the lower rate you can qualify for.
Make Biweekly Payments Instead of Monthly
Making biweekly payments simply means dividing your regular monthly payment in half and paying that amount every two weeks.
So instead of 1 payment of $400 per month, you would make 2 payments of $200 each month. This leads to making an extra monthly payment each year, since there are 52 weeks in a year.
Those extra 12 payments help you pay down the principal much faster. Here’s an example:
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5 year loan at 6% interest
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Monthly payment: $400
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Total interest paid: $2,400
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Biweekly payment: $200
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Total interest paid: $1,900
The biweekly schedule saves $500 in interest and lets you pay off the loan nearly a year early. The more interest you save, the faster you pay down the principal balance.
Biweekly payments are one of the simplest ways to pay off auto loans ahead of schedule without significantly increasing your payment amount.
Make an Extra Payment Each Year
Another easy way to chip away at your auto loan faster is to make one extra payment each year. This could be a lump sum when you get your tax refund, bonus at work, or any other source of extra cash.
As an example:
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4 year loan at 5% interest
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Monthly payment: $325
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With one extra $325 payment each year:
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Interest saved: $367
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Months shaved off: 7
That extra principal-only payment helps you pay off the loan 7 months faster and saves a nice chunk of interest. The key is ensuring that extra amount goes straight to principal rather than future interest.
Round Up Your Monthly Payments
Rounding up means paying a little extra each month to hit a round number. For instance, rounding a $486 monthly payment up to $500. This adds up over time, letting you pay off the loan faster.
Here’s how it works:
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Original monthly payment: $486
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Payment rounded up to $500: extra $14 per month
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By rounding up, you would pay off the loan 3 months faster and save $157 in interest charges.
The impact gets larger the more you round up each payment. Even small rounding like $5-10 extra can make a difference. It’s an easy way to pay a bit more each month without much effort.
Apply Windfalls and Cash Gifts
Any financial windfalls or cash gifts that come your way can be applied toward the principal on your car loan. This includes things like:
- Tax refunds
- Bonuses at work
- Rebate checks
- Gift money
- Proceeds from selling assets
Say you get a $1,500 tax refund and put it toward your auto loan principal. On a $15,000 loan at 6% APR, that one lump sum payment would shave 6 months off your repayment term.
The key is resisting the urge to spend these surprise cash influxes and instead using them to pay down your highest interest debts. Knocking large chunks off your car loan principal is a fast way to speed up payoff.
Pay Half on Your Next Car Early
When you’re nearing the end of your auto loan, get a head start on the next one by paying for your down payment over time. For instance, if you plan to put $5,000 down on your next car, start socking away $100-200 per month in savings.
That way, once you trade in your current vehicle, you can put 50% or more down on the next one right away. This will keep the loan balance low, reducing the interest you pay and making it easier to pay off quickly.
Paying a large down payment is one of the best things you can do to pay off your next auto loan faster. Get the savings process started early.
Should You Pay Off Your Car Loan Early?
Paying off your auto loan faster than required can save a lot of money in interest charges. However, it’s not necessarily the smart thing to do in every situation.
Here are some things to consider before deciding to pay off your car loan early:
Prepayment Penalties – Some auto loans impose a penalty for paying off the loan too fast. The fee could cancel out the interest savings. Check your loan contract first.
High Interest Debt – If you have credit card balances or personal loans above 5-10% APR, it may be better to pay those down first before putting extra toward lower rate car debt.
Credit Mix – Paying off installment loans like auto financing too fast can actually lower your credit score briefly. Having open accounts helps your ‘credit mix’.
Emergency Savings – Don’t pay extra toward debt if you don’t have at least 3-6 months of living expenses saved up for an emergency fund. Savings come first.
Investment Returns – If you can earn higher returns investing the money elsewhere, like your 401(k) plan, it may make more sense than prepaying low interest debt.
As you can see, there are many different ways to pay off a car loan ahead of schedule. Each strategy involves making extra payments, whether recurring or one-time windfalls, toward the principal balance. This reduces the amount of interest that accrues over the life of the loan.
The faster you can minimize interest charges, the quicker you can pay down the principal and own your car free and clear. Use these tips to pay off your auto loan rapidly and get out of debt for good. Just make sure it aligns with your overall financial plan and goals first.
Adjust Your Budget
Create a budgeting strategy that will free up enough money for you to make quick progress on your car loan. If youd like to make biweekly payments to limit the amount of interest you pay, try using the 50/30/20 rule or the pay-yourself-first budget to immediately set aside a certain percentage of your paycheck for car loan payoff. Then set up automatic payments from your bank account to your lender for the amount youve chosen to put toward the debt.
You can also look for ways to increase your income and put the extra money toward paying off your car loan early. Beyond that, look into ways to reduce expenses. For example, you could audit all of your bills and recurring expenses to see which you can cancel or negotiate to a lower price.
Learn more: How to Stick to a Budget
Avoid or Cancel Add-On Expenses
Car add-ons are features that are nice-to-haves but not must-haves, like extended warranties or maintenance contracts. If you roll these costs into your car loan, that increases the size of the loan.
Saying no to these additional expenses when you first get a car loan is one way to reduce borrowing costs and pay off the loan faster. If youve already opted for certain services, you can cancel them and potentially get a refund, prorated for the remaining time left on your policy. Once the features or services are removed from your loan, you may find your monthly payment is lower. You can then pay extra toward the principal balance as a result, speeding up repayment.
How To Way To PAY OFF Your Car Loan in HALF the Time!
FAQ
How do I pay off my car loan quicker?
How long does it take to pay off a $20,000 car?
A $20,000 loan at 5% for 60 months (5 years) will cost you a total of $22,645.48, whereas the same loan at 3% will cost you $21,562.43. That’s a savings of $1,083.05. That same wise shopper will look not only at the interest rate but also the length of the loan.
What happens if I pay an extra $100 a month on my car loan?
What happens if I make two car payments a month?