6 Tips On How To Pay Off Your Car Loan Early
About one out of three American adults don’t own a house. If you are one of them, that means there is an excellent chance that your largest financial obligation is your car.
About seven out of 10 people – even those who are quite wealthy – borrow money to buy their cars. So that tells you there are a lot of lenders and other car dealerships making a lot of money financing vehicles.
If you are currently repaying a car loan, chances are that the life of the loan is 12 to 72 months. If it is 72 months, that means you are paying a lot of interest, even if you have a good credit score and a low interest rate. It is in your best interest, of course, to repay the loan as quickly as possible, so here are six steps to make that happen.
1. Round Up
This is an easy way to pay a little extra each month, and paying a little extra each month is the least painful way to repay your car loan more quickly. If you borrowed, say, $9,000 at a 10-percent interest rate for 72 months, your monthly payment is $166.73, and you will repay the loan in 72 months, having paid $3,004.74 in interest. However, if you decide to pay $200 a month, you will repay the loan in 59 months, having paid only $2,327.18 in interest – a savings of $677.56.
2. Pay Half The Amount Every Two Weeks
This may seem like a wash, but if your lender allows you to use this payment schedule, there is an advantage to you: You will end up making 26 half-payments per year, or 13 full payments, rather than 12 monthly payments. Under the scenario above, with the 72-month, $9,000 loan, you will save only $28.54 in interest – so it doesn’t hurt the lender to allow this -- but you will repay the loan in 66 months rather than 72. This option is easier for those who get paid every two weeks.
3. Make One Large Extra Payment Per Year
And it doesn’t matter when you do it. Let’s say you borrow $18,000 over 72 months with a loan that charges a 10-percent interest rate. Your monthly payment will be $333.47, and by the time you finish repaying the loan, you will have paid $6,009.49 in interest. If, however, you make an extra payment of $1,000 a year, you will repay the loan in 56 months, having paid $4,665.65 in interest – a savings of $1,334.84 in interest.
4. Make One Large Payment Over The Term Of The Loan
If you do this, an obvious choice is to sacrifice a tax refund check. If you borrow $18,000 over 72 months and decide to make a lump-sum payment of, say, $4,000, you will repay the loan in 53 months rather than in 72, and you will have paid $3,352.75 in interest – a savings of $2,657.04.
5. Avoid The Offer To Skip Payments
Some lenders will let you skip your payment once or even twice a year, especially the payment in December when much of your disposable income is going toward Christmas presents. It may be tempting, but don’t do it. Not only will this lengthen the term of your loan, but it will cost you more in interest. In the case of the $18,000 loan, lengthening the loan six months – from 72 to 78 months -- will cost you an additional $542.17 in interest. You can buy a lot of Christmas presents with that.
6. Refinance Your Loan
Pursue this option only if it makes sense for you. When you refinance, your monthly payment should at least remain the same if not be lower, and the term – or length -- of the loan should be shorter. In other words, even if your monthly payment remains unchanged, the refinancing should allow you to pay less interest in the long run. Otherwise, refinancing makes no 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.
Finally, there is no requirement that you repay your car loan early, and some borrowers just cannot afford to do it. But if you can and you want to do it, you will save hundreds or even thousands of dollars in interest if you repay your car loan early. Which, of course, your lender doesn’t want you to do.
Therefore, before you sign any auto loan documents, make sure you understand what your lender will or will not allow you to do as far as repaying your loan early. Then go online and look for a good auto loan amortization calculator which will help you see how you can pay less interest by changing your payment schedule.