Pay Off Your Auto Loan Faster with These 6 Pro Tips
Do you have an auto loan that you’re struggling to pay off? Just know that you’re not alone. In fact, the average auto loan debt per household is well over $15,000. So, if you’re looking for ways to pay off your auto loan faster, you’ve come to the right place.
In today’s article, we will share with you not only how to pay off your car loan but also some tips on doing it as fast as possible.
The 6 pro tips we will go in-depth about are:
- Making biweekly payments
- Refinancing an auto loan
- Rounding up the payments
- Check for add-ons
- Using debt snowball payments
- Making extra payments
But besides these, we want to offer you some additional advice. First and foremost, always try to pay more than the minimum downpayment. The minimum monthly payment due will only cover the interest portion of your auto loan and not reduce the principal balance.
Second, make sure you ask your lender about some additional discounts if they offer any. In case you are a long-time customer of your bank or credit union, they may give you additional benefits and discounts.
Third, this goes more for buying a car than the loan itself, but be cautious about what kind of vehicle you are choosing. Keeping your car well-maintained and avoiding costly repairs will help you save money you can then use to pay off your loan faster.
How to Pay Off Your Auto Loan Faster
Now that you know that you can pay off an auto loan early, you may be just missing a few details on how to do so.
Most people will tell you that the best way to pay a car off early is by making monthly payments and trying not to miss any. While this is completely true, there is more to it than just that. First of all, that is not the only way to do it!
Let’s take a more comprehensive look at other payment tactics to achieve the results you want.
1. Make biweekly payments
Biweekly payments are a way to make extra payments on your auto loan. They’re designed to help you pay off your debt faster by making twice as many installments over the course of a year.
This means you will be making a payment every two weeks instead of once a month. By doing this, you’ll make 26 payments a year instead of 12, and not only save on interest but also pay everything off twice as fast.
If you want to switch to this payment schedule, talk to your lender about setting up a new repayment plan. But, be cautious, if you are unsure you can afford this intense agenda, don’t sign up for it. There are other methods to pay off an auto loan early that may be more suitable for you.
2. Refinance your auto loan
If you have an auto loan with a high-interest rate, refinancing may be beneficial to you. In case your current interest rate is above the market average and you can find a lender willing to give you a lower one, then it might be worth considering refinancing to get a much better deal.
Other reasons why you should consider this method include:
- You have a higher credit score than when originally getting your auto loan
- Your debt-to-income ratio has improved since initially applying for financing (i.e., less debt and more income)
- You need lower monthly payments in order to free up some cash
Refinancing your auto loan can be a great way to save money and pay off a car loan early. Just make sure you do your research and compare rates before making any decisions.
Also, you are essentially taking more debt in order to pay the previous loan you took out, so be sure that the new loan you are applying for is more favorable than the previous one.
3. Round up all your auto loan payments
This is a good method for paying off a car early for people who don’t want to commit to biweekly payments. Think of adding a bit more money to every payment you make just to round it up to the nearest even number. For example, if your monthly payment is $250, you could pay an extra $50 each month.
Even though these payments are not significantly bigger, they will still help you pay off the loan faster and save on interest. Also, you don’t have to commit to this every month. When you have some extra cash, pay more, when you are a bit tight with cash, just skip one month.
4. Check and identify any auto loan add-ons
Add-ons are additional charges that are added to your loan. Sometimes they can be beneficial but other times they can be detrimental.
If your auto loan has add-ons, it’s important to check and identify them so you can factor them into your plan to pay off your loan faster. Some common add-ons include extended warranties, gap insurance, and prepaid maintenance plans. You may be able to negotiate with your lender to have some of these add-ons removed from your loan or rolled into the principal balance so you can save money on interest charges.
5. Use debt snowball payments
This method is a good way to keep you motivated and focused on your goals, as you will be able to see the progress that you are making with your debt. It is suitable for when you have multiple debts to pay. It involves paying off your smallest debt first and then using the remaining money to make a payment toward your next smallest debt.
It is important to note that you should still make the minimum payments on all of your other debts while you are working on paying off your smallest one in full first. Otherwise, you may end up paying more in interest overall.
6. Pay a significant extra payment
You can also be paying a car loan off early by making a significant extra payment. The key here is to make sure that you can afford it and that you don’t miss any future payments as a result.
This can be done as either a lump-sum payment or a larger monthly payment for the next few months.
Some lenders may allow you to make one-time lump sum payments over and above your regular monthly payment. Do some research online or call them directly to find out more about what they will accept from you as far as additional funds go. If they don’t approve additional lump sum payments but do allow for higher monthly installments than normal try increasing your regular amount instead.
Keep in mind that you may need to adjust your budget in order to make this happen, but it will be worth it in the long run.
Should You Pay Your Auto Loan Off Early?
- If your interest rate is high, it may be worth paying off your auto loan early if you can afford to. On the other hand, if your interest rate is low or on a fixed rate, it’s probably not worth paying off early unless you have a large balance or high monthly payments.
- If the balance on your auto loan is large (e.g., $20,000), then it could be beneficial for you to pay off the entire loan sooner rather than later. This is because of the significant savings that would accrue from eliminating monthly payments.
- If you have a pre-computed loan, paying it off early will not save you any money in interest charges because the interest is already calculated into the loan. However, if you have an open-ended loan, paying it off early could save you money in interest charges.
Before making a decision about whether or not to pay off your auto loan early, weigh all of these factors carefully. It may be best to speak with a financial advisor to get expert advice on what is best for your situation.
When You Should Not Pay Off Your Auto Loan Early
If you have an auto loan, you might be tempted to pay it off as quickly as possible. However, there are some circumstances when it might not make sense to do so.
- If you are unsure you can afford to do so.
- If your auto loan has a low-interest rate.
- If you have a short-term loan.
If any of these apply to you then it might be better to keep paying off the car slowly rather than taking an expensive risk by paying it off early and possibly getting stuck in a bad financial situation.
Does Paying Off an Auto Loan Early Affect Your Credit?
As you’re paying off your auto loan and getting closer to owning your car outright, you may be wondering whether or not it will affect your credit score if you pay off the loan early. The short answer is probably not. Paying off the loan early won’t affect your credit score at all if you have a good score.
In fact, it’s actually better for you when you do this because then you can get a new car loan with a lower interest rate and lower monthly payment. You can also save money on insurance and other costs associated with owning a vehicle by saving up more in advance to pay off the balance of your old car loan without having to take out another one.
However, if you have bad credit, paying off your loan early could actually hurt your score. That’s because lenders like to see that you’re consistently making on-time payments over the life of the loan. If you pay it off early, they may view you as a higher-risk borrower and could raise your interest rates or deny you future loans.
How to Get Out of Auto Loan Debt?
By following the tips we gave you, you can get out of car debt. We covered a few methods so just be sure to take your time and find the one that best suits your financial situation. If you are struggling to make a decision, we recommend you hire a financial advisor to help you.
Also, don’t get pressured to take out any additional debt to pay for miscellaneous things as this can easily get you trapped in a never-ending cycle of debt.
Use the borrowed money wisely, and only take new loans if they are offering lower interest rates and more favorable terms.
Final Thoughts
When deciding whether or not to pay off your auto loan early, it’s important to understand the consequences of doing so. If you’re thinking of paying off your auto loan due to a financial emergency or just want to be debt-free, then it may be worthwhile.
It is possible to pay it off faster, but it can be difficult to know how much money you can save. Also, it’s important to know that there are many different ways to pay off an auto loan and each person may have different needs in this area.
