How to Pay Off a Car Loan Faster
Friday, Jan 19 2024
The average loan term for a new car is more than 70 months, meaning almost six years of interest payments. The most significant benefit of paying off your auto loan early is savings. The sooner you pay off a loan, the less you’ll spend on interest. Even if you can only shave a few months off your original payment plan, you can benefit financially. In addition to eliminating debt, paying off your loan can relieve stress and anxiety.
While it may seem like a great idea, you’ll want to know your loan’s ins and outs and financial situation first. Focus Federal Credit Union recommends eight strategies for how to pay off a car loan faster. We’ll explain them in this post.
8 Ways to Pay Off a Car Loan Faster
The most obvious reason to pay off a car loan early is it saves you money by reducing the interest you pay. It also can free up cash, giving you more opportunities to put your money toward other debts or necessities. You could even use the savings to start an emergency fund. Here are some ways to pay off a car loan faster.
1. Refinance Your Loan
Refinancing your vehicle loan can be an easy way to pay it off faster. Refinancing could offer you the opportunity to get a lower interest rate, better loan terms, or both. It can be especially beneficial if you’ve improved your credit score since you initially took out the loan.
Refinancing could save money by lowering the auto loan interest rate. You can reduce your rate but keep your monthly payment the same. This will allow you to pay off your debt faster. Keep in mind refinancing will create a new car loan, which will come with fees and additional costs. You’ll want to include these costs in your calculations.
For example, let’s say you refinance your $30,000 vehicle loan at 12.00% APR over six years to a new loan at 9.00% APR with a five-year term. With the shorter loan term, your payment increases, but the tradeoff is you would pay off the loan a year sooner and save nearly $5,000 in interest.
2. Make Biweekly Payments
Making biweekly payments is one of the best ways to pay off your car loan faster. Instead of making one full monthly payment, you split your payment amount in two and pay every two weeks. Annually, you pay the lender 26 times instead of monthly. Switching to biweekly payments, you make an extra payment per year. While the difference may seem minor, it adds up over the term of your loan.
For example, your payment is $450 per month. If you switch to biweekly payments, you pay an extra $450 by the end of the year. You’ll still have interest debt left to deal with, but it’ll be much less than if you remained on the original timetable.
- Monthly Payment: $450 x 12 = $5,400
- Biweekly Payment: $225 x 26 = $5,850
3. Round Up Your Payment
Another option is to round up your monthly payment. Rounding up your car loan payment by $25 can reduce your loan balance quicker without spending much extra money in the short term. You set and vary the amount by rounding it up based on your monthly cash flow. So, for one month, you could round up by $25 and the next $50. If you round up consistently, even just a minimal amount, you can cut months off the life of the loan.
Let’s return to the example of a $30,000 car loan at 12.00% APR and a six-year term with a monthly payment of $586.51. Increase your monthly payment to $600, and you’ll pay off your loan three months sooner just by adding an extra $14 monthly to your payment.
4. Make One Large Annual Payment
Make one large payment per year in addition to your monthly payments. This is a one-time version of rounding up, but it doesn’t matter when you do it. Commit annually to making one lump-sum extra payment.
For example, if you make one extra payment of $586.61 per year, you can repay the loan in 67 months instead of 72 months.
5. Avoid Skipping Payments
The fastest way to avoid getting your loan paid off early is to miss or delay a payment. Skipping payments will only lengthen the term and cost you more in interest.
Missing a payment will also lead to problems with potential penalties, fines, or additional fees.
If you aim to get your loan paid off early, never skip a payment. Steer clear of this risk by signing up for automatic payments.
6. Use Bonuses and Tax Refunds
Tax returns, bonuses, or a cash gift can be opportunities to reduce your principal. Even small, sporadic boosts in the monthly payment will allow you to save money over time.
For example, assume your monthly payment is $586.61. You receive a tax refund of $2,500. If you apply the entire refund to the loan, you will pay off your loan four months faster.
7. Reduce Unnecessary Expenses
One way to get cash for an extra payment is to cut a few small costs from your budget. Make minor changes, log your savings, and redirect the amount toward your loan.
Certain loans include extra fees and dealer add-ons. Dig into your loan paperwork and sales documents to see if you are paying for a service contract, extended warranty, or exterior and interior protection package. Contact your dealership or lender to see if you can cancel unwanted add-ons. You may get a partial refund or credit for payments made.
8. Earn Extra Income
Eager to pay off a loan faster? Boosting your income could be just the ticket. If you’re not getting a raise at work, you might need to take matters into your own hands and secure a side hustle. Start with skills you know and the sort of work you like doing. Extra money from tutoring, house-sitting, or offering childcare services can quickly add up.
Considerations Before Paying Off a Loan Early
Even though paying your car loan early may save you money and stress, it’s not for every situation.
It doesn’t make sense to pay off your loan faster if:
- Your Lender Charges a Prepayment Penalty. Certain car loans come with a prepayment penalty, a fee you’ll be charged if you pay off your loan early. If your loan includes this fee, determine whether the benefits of paying off your loan early costs you less than the fee.
- Other Debts Have Higher Interest Rates. Look at your other debts, like credit cards and personal loans. If these debts have a higher annual interest rate, it may make better sense to put extra cash towards them before focusing on your car loan.
- You Need to Build Credit. On-time bill payments play a significant role in determining your credit scores. Keeping the account open could positively impact your credit if you make payments on time and in full.
- You Can’t Afford It. Review your other monthly bills like rent, utilities, and other regular payments. If paying off your vehicle early would stretch your finances too thin or leave you unable to afford other expenses, stick with your current loan plan.
How Focus Federal Can Help
Evaluate your financial situation and choose the strategies that work best for you. If you decide to pay more than your monthly payment amount, ensure your lender applies the extra money to the principal, not the interest.
Focus Federal Credit Union can help you understand how to pay off a car faster. We also offer auto loans and refinancing. Contact us to learn more about your options.