Why pay more than your car is worth when you can pay off your car loan early?
About seven out of 10 people borrow money to buy their cars, and a car loan is one of the largest financial obligations you can have.
If you’re one of them, you may have a loan that will take you 60 or 72 months to pay off. That’s five to six years! That’s too much interest to have to pay. So we want to help you get out from under that loan faster and save money on interest by giving you 6 ways to pay off your car loan early.
How to Pay Off Your Car Loan Early
1. Pay half your monthly payment every two weeks
This may seem like a wash, but if your lender will let you do it, you should. With a payment every two weeks, you’ll end up making 26 half-payments per year. That adds up to 13 full payments a year, rather than 12.
If you have a 60-month, $10,000 loan, you’ll save only about $35 in interest, but you’ll repay the loan in 54 months rather than 60. That’s six months of your life back and can be an easier transition if you get paid every two weeks.
2. Round up
Instead of just paying what is recommended, round your payments up to the nearest $50 to help repay your car loan more quickly.
Say you borrowed $10,000 at a 10% interest rate for 60 months, then your monthly payment is $212.47. With that payment, you’ll repay your car loan in 60 months, having paid $2,748.23 in interest.
However, if you decide to round up and pay $250 a month, you’ll repay your car loan in 47 months, having paid only $2,214.69 in interest — saving you $533.54!
3. Make one large extra payment per year
This is the one-time version of rounding up. But it doesn’t matter when you do it.
Let’s say you borrow that same $10,000 over 60 months at 10% interest. If you make an extra payment of $500 a year, you will repay the loan in 49 months, having paid $2,279.35 in interest — a savings of $468.88 in interest.
4. Make at least one large payment over the term of the loan
And the savings just continue. By making at least one, larger additional payment a year, you’ll save even more in interest. Just remember, the earlier you make your big payment the sooner you’ll pay off your car loan. The early bird gets the savings, or however it goes.
5. Never skip payments
Some lenders will let you skip your payment once or even twice a year. Resist the temptation. Skipping payments will lengthen the term of your loan and cost you more in interest.
6. Refinance your loan
This is where you take your loan and negotiate a new monthly payment and pay-off date. Only do this if it gets you a lower monthly payment and/or a sooner pay-off date (re: term).
Otherwise, refinancing makes little sense. You don’t want to lower your monthly payment and lengthen the term of your loan because you’ll end up paying the same principal and a lot more interest.
Don’t Forget to Check Your Rate
Even if the outstanding balance of your car loan is large, it’s unlikely to be your loan with the highest interest rate. That honor tends to go to credit cards, the average rate of which is about three times higher than the average auto loan interest rate.
But if you’re focusing on your car loan, we hope this has helped you create a winning strategy toward becoming debt-free and even keep a few extra dollars in your pocket as you pay off your car loan early!