The 5 Best Ways To Pay Off A Car Loan Faster
Buying a new car typically ranks in the top 20 of greatest life experiences. But with a new car even if it’s a used one you are more than likely using some sort of financing.
Now financing is great for the lenders and manufacturers. They can charge you interest for 60 to 72 months and in some cases even longer. That is 5-7 years of interest going to something that does not appreciate in value!
If you weren’t aware here’s the news flash: Most cars are liabilities losing value as soon as you drive it off the lot.
So your goal should be to pay this debt off as soon as humanly possible. You may be thinking “ Easier said than done”. But, it doesn’t have to be.
Here are 5 ways to pay off your car faster.
Just know Each tip is based on the best ways to pay off your car loan in the quickest time possible.
#1 Round Up As Much As You Can.
By far one of the simplest ways to pay off your car loan faster is to round up each payment you pay on the loan.
Start with something small. It can be as little as 10 additional dollars more to your monthly payment. Now of course the higher you round up the greater the impact you will have on the accruing interest.
Examples works best so I would provide two.
The first example will reflect a 10 dollar round up and the 2nd will reflect a 50 dollar round up.
By having both examples this will present a more complete picture and visual contrast. In each example the annual percentage rate will reflect someone who has had credit challenges. This is not uncommon especially during the pandemic we now face.
Example a
You take out a car loan for $20,000 at a 10% interest rate for 60 months.
This will render you a monthly payment of $425. Now lets add the 10 dollar round up to the equation. You will not only save 172 in interest payments but also reduce your loan term from 60 months to 58
Example B
Lets use the same loan terms 20k at 10% interest for 60 months. Now we add a 50 dollar round up.
This saves a whopping $761.00 dollars in interest and speeds up your loan term from 60 months to 52 months.
#2 If Allowed Pay Twice A Month Instead Of Once.
This hack has a twofold benefit. The first benefit is it actually allows you to roughly add one additional payment a year.
By paying twice a month you end up making 26 half payments per year. This translates to 13 full payments rather than 12 for the year.
In addition you are typically paid on a two week basis. This makes it easier to schedule since it is more aligned with your pay schedule. But this is only the icing on the cake.
The second benefit is found in the fact you are paying part of your monthly bill early every month.
In doing so you are reducing the loan principle slightly head of schedule. Less loan principle means less interest you are paying to car companies.
Just be sure your loan terms does not penalize you for early repayment.
#3 Do Not Skip Payments At All Costs.
In attempt to draw customers and to incure additional interest income some car lenders will let you skip your payment once or even twice a year. Although tempting you must resist the urge with extreme prejudice.
What sounds like a break will only cost you more in the end. Not only does skipping payments lengthen the term of your loan it also cost you more in interest. Do not skip payments at all costs..
4) Beware And Avoid The Lure To Refinance Your Car Loan
Now there is a popular belief that if you can refinance your car loan for a lower interest rate, you will save on interest and consequently pay off your loan faster. Now in theory that makes perfect sense. However, in reality it never works out that way.
The reason being is there is always a cost to refinance your loan. No lender does not do something unless they can find a profit margin. That typically means charges, fees, additional costs to incur new terms and or refinance your existing loan.
Of course there are some exceptions, although extremely rare.
For example: If you received a subprime car loan of over 13% when you initially purchased your car and you can now qualify for a loan of 6% or less serves as an example. If this is your case then by all means refinance your car loan as the savings will most likely offset the additional costs.
But, again I reiterate this usually is not the case. It is important to remember no matter how much they try to change the narrative most cars are liabilities and it is in your best interest to pay them off as quickly as possible.
5) Make Extra Use Unexpected Income and Just Pay More.
It goes without saying that the more money you can put towards your car loan the faster you will be able to pay it off. Here is a two way approach combined into one:
A) Make use of any unexpected income.
We all have times when there is additional income that comes in. In better times it used for enjoyment. It requires a little more discipline but do your best to use any additional income as payment towards your car loan balance.
Check with your lender to see if it could be applied to the principal. Always be sure to check for prepayment penalties so your efforts are not a vain attempt.
B) Make a large payment of $500.00 once a year.
Not easy to do in this economic climate but definitely should be attempted. An extra payment a year will save you years of interest. Take for instance if you had these terms for a car loan: $10,000 dollar loan for 60 months at 10% interest. If you make an extra payment of $500 a year, you will repay the loan off in 49 months.
Paying off your car loan faster is not a fantasy or out of your reach. Any of these approaches by themselves can put you on a path to early payoff. If you combine one or able to apply all the tips you will see years dropped off from your loan terms.
As always be sure to check with your lender to have clarity on your loan terms. These approaches will not be effective if there are any prepayment penalties.