Taking out a car loan is often necessary to buy a vehicle when you don’t have the full amount in cash. Car loans allow you to spread out the cost over several years through monthly payments But did you know you can pay off your auto loan faster and save on interest by making extra principal payments?
Using an amortization calculator with an extra payment option can help you estimate how much time and money you’ll save when you put extra funds toward your car loan principal In this comprehensive guide, we’ll explain everything you need to know about using these useful calculators
What is a Car Loan Amortization Calculator?
An amortization calculator shows you how your car loan principal amount and interest are spread out over the full payment term. It breaks down:
- The total interest you’ll pay over the life of the loan
- How much of each payment goes to interest vs principal
- The remaining balance after each payment
This helps you see how your loan balance decreases with every monthly payment Amortization calculators allow you to input details like
- Loan amount
- Interest rate
- Loan term
- Compounding period (monthly, daily, etc)
Then it does the math to estimate your monthly payment amount and full amortization schedule.
Why Use an Amortization Calculator With Extra Payments?
A standard amortization calculator only shows your regular required monthly payments. But adding extra principal payments can have big benefits:
- Pay your loan off faster
- Reduce total interest paid over the loan term
- Lower your monthly payments
An amortization calculator with an extra payment option lets you estimate the impact of adding regular or one-time lump sum payments. You can forecast how they’ll reduce your overall interest costs and remaining loan balance.
How Do You Calculate Extra Payments on a Car Loan?
Most auto loan amortization calculators with extra payments work similarly. Here are the key steps:
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Enter your current car loan details – amount, interest rate, compound period, term length, and payment amounts.
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Input any regular extra monthly or annual payments you want to make.
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Add any one-time extra amounts you plan to pay.
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Enter the start and end dates for the extra payments.
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The calculator will show your new payoff timeframe and interest savings with the accelerated payments.
Things to remember:
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Interest compounds based on your loan terms (often monthly)
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Extra payments reduce the principal balance only
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Don’t skip required payments until the loan is fully paid off
Examples of Extra Car Loan Payments
Here are a few examples of how extra principal payments can shorten your auto loan term and interest costs:
Example 1
- 5 year car loan
- $20,000 balance
- 5% interest
- $377 regular monthly payments
- $100 extra per month for 2 years
Results:
- Loan paid off in 4 years 3 months
- $760 in interest savings
Example 2
- 6 year car loan
- $15,000 balance
- 4% interest
- $245 regular monthly payments
- $1,000 one-time extra payment in month 18
Results:
- Loan paid off in 5 years 5 months
- $387 in interest savings
Example 3
- 4 year car loan
- $12,000 balance
- 6% interest
- $284 regular monthly payments
- $100 extra per quarter for 2 years
Results:
- Loan paid off in 3 years 6 months
- $456 in interest savings
As you can see, extra payments make a big difference over the lifespan of your car loan. Use an auto loan amortization calculator to play with different amounts.
Amortization Schedule With Extra Car Loan Payments
One helpful feature of amortization calculators is generating an amortization schedule. This shows the impact of extra payments month-by-month over the full payoff period.
Your amortization schedule will display:
- Payment number
- Interest paid
- Principal paid
- Remaining balance
- Cumulative interest paid
You’ll see how extra principal payments reduce your balance faster. And the interest drops more quickly since it’s calculated against the declining loan balance.
Reviewing the full amortization schedule gives you a clearer picture of the time and interest savings with accelerated payments.
Tips for Paying Off Your Car Loan Early
Here are some top tips to pay down your auto loan faster:
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Make biweekly payments – This essentially gives you one extra payment per year.
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Split your payment – Pay half mid-month and half on the due date.
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Pay the sales tax separately – So less is financed into the loan principal.
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Apply cash windfalls – Use bonuses, tax refunds or gifts to make extra principal payments.
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Increase your payment – Even $20 or $50 more can make a difference.
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Refinance your loan – You may qualify for a lower rate to reduce interest costs.
The earlier you pay down principal, the more interest you’ll save over the long run. So put any extra funds toward your car loan as soon as possible.
Other Ways to Pay Off Your Auto Loan Faster
Aside from extra payments, here are some other smart strategies to get out of debt faster:
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Trade in your car for a less expensive model to lower the principal
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Sell non-essential assets and use the cash to pay down your loan
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Pick up a side gig or overtime hours at work and use that income for extra payments
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Avoid late fees and penalties so all your payments go toward principal and interest
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Make lifestyle changes to free up more cash in your budget for accelerated payments
Every bit of extra money helps knock down your overall auto loan balance. Look for creative ways to come up with additional funds beyond your regular monthly payment.
Auto Loan Amortization Calculator Mistakes to Avoid
It’s easy to make mistakes when using an amortization calculator with extra payments. Be aware of these common errors:
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Forgetting to account for compound interest in your calculations
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Assuming extra payments will reduce your regular required monthly payments (they don’t until the loan is paid off)
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Not verifying if there is a prepayment penalty with your lender before making lump sum payments
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Entering an incorrect loan balance, rate, or payment amount
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Mixing up the dates or amounts for one-time and recurring extra payments
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Thinking you can skip payments after making extra principal payments (you can’t)
Double check all your inputs and loan details before relying on the calculator results. Garbage in, garbage out applies here, so take your time entering accurate information.
Pros and Cons of Paying Off a Car Loan Early
Weigh these key pros and cons before deciding if you want to pay down your auto loan ahead of schedule:
Pros
- Save money on interest charges
- Pay off your debt faster
- Lower monthly payments eventually
- Free up cash flow sooner
- Build equity in your vehicle
Cons
- Less flexibility in your budget each month
- Impact your credit score mix of accounts
- Lose low auto loan interest rate in some cases
- Require lump sum amounts to make a big impact
- Miss out on potential investment returns if money is tied up in your car
For most people, the benefits of paying off their car loan early outweigh the drawbacks. But be sure to consider your own financial situation before committing to extra payments.
When Does it Make Sense to Pay Off a Car Loan Early?
Here are some key times when it pays to put extra money toward your auto loan principal:
- Your loan term is 5 years or longer
- You have a high interest rate over 5%
- You need to free up monthly cash flow
- You have a large windfall or bonus payment
- You are close to paying off the loan
- You want to sell or trade in the vehicle
The prime opportunity is when you first take out the loan. Extra payments in the early years save the most interest since the balance is highest. Paying down principal fast also builds equity quicker.
Do Early Payments on a Car Loan Impact Your Credit?
Paying off your auto loan faster by adding extra principal payments shouldn’t directly hurt your credit scores. Any on-time payments you make will help your payment history.
However, eliminating the loan account will change your credit mix once it’s paid off. This could potentially have a minor negative impact on your scores if you don’t have other installment loans reporting.
The interest savings tend to outweigh this smaller ding to your credit. Just be sure to maintain other credit accounts responsibly.
When to Avoid Prepaying Your Auto Loan
Here are some situations when you may want to avoid prepayments on your car loan:
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You have high-interest rate credit card debt or other loans
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You don’t have an emergency fund and need liquidity
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Your lender charges prepayment penalties
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You want to use extra funds for more valuable goals like
Dealership Financing vs. Direct Lending
Generally, there are two main financing options available when it comes to auto loans: direct lending or dealership financing. The former comes in the form of a typical loan originating from a bank, credit union, or financial institution. Once a contract has been entered with a car dealer to buy a vehicle, the loan is used from the direct lender to pay for the new car. Dealership financing is somewhat similar except that the auto loan, and thus paperwork, is initiated and completed through the dealership instead. Auto loans via dealers are usually serviced by captive lenders that are often associated with each car make. The contract is retained by the dealer but is often sold to a bank, or other financial institution called an assignee that ultimately services the loan.
Direct lending provides more leverage for buyers to walk into a car dealer with most of the financing done on their terms, as it places further stress on the car dealer to compete with a better rate. Getting pre-approved doesnt tie car buyers down to any one dealership, and their propensity to simply walk away is much higher. With dealer financing, the potential car buyer has fewer choices when it comes to interest rate shopping, though its there for convenience for anyone who doesnt want to spend time shopping or cannot get an auto loan through direct lending.
Often, to promote auto sales, car manufacturers offer good financing deals via dealers. Consumers in the market for a new car should start their search for financing with car manufacturers. It is not rare to get low interest rates like 0%, 0.9%, 1.9%, or 2.9% from car manufacturers.
Car manufacturers may offer vehicle rebates to further incentivize buyers. Depending on the state, the rebate may or may not be taxed accordingly. For example, purchasing a vehicle at $50,000 with a cash rebate of $2,000 will have sales tax calculated based on the original price of $50,000, not $48,000. Luckily, a good portion of states do not do this and dont tax cash rebates. They are Alaska, Arizona, Delaware, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Hampshire, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Vermont, and Wyoming.
Generally, rebates are only offered for new cars. While some used car dealers do offer cash rebates, this is rare due to the difficulty involved in determining the true value of the vehicle.
A car purchase comes with costs other than the purchase price, the majority of which are fees that can normally be rolled into the financing of the auto loan or paid upfront. However, car buyers with low credit scores might be forced into paying fees upfront. The following is a list of common fees associated with car purchases in the U.S.
- Sales Tax—Most states in the U.S. collect sales tax for auto purchases. It is possible to finance the cost of sales tax with the price of the car, depending on the state the car was purchased in. Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that dont charge sales tax.
- Document Fees—This is a fee collected by the dealer for processing documents like title and registration.
- Title and Registration Fees—This is the fee collected by states for vehicle title and registration.
- Advertising Fees—This is a fee that the regional dealer pays for promoting the manufacturers automobile in the dealers area. If not charged separately, advertising fees are included in the auto price. A typical price tag for this fee is a few hundred dollars.
- Destination Fee—This is a fee that covers the shipment of the vehicle from the plant to the dealers office. This fee is usually between $900 and $1,500.
- Insurance—In the U.S., auto insurance is strictly mandatory to be regarded as a legal driver on public roads and is usually required before dealers can process paperwork. When a car is purchased via loan and not cash, full coverage insurance is often mandatory. Auto insurance can possibly run more than $1,000 a year for full coverage. Most auto dealers can provide short-term (1 or 2 months) insurance for paperwork processing so new car owners can deal with proper insurance later.
If the fees are bundled into the auto loan, remember to check the box Include All Fees in Loan in the calculator. If they are paid upfront instead, leave it unchecked. Should an auto dealer package any mysterious special charges into a car purchase, it would be wise to demand justification and thorough explanations for their inclusion.
Preparation
Probably the most important strategy to get a great auto loan is to be well-prepared. This means determining what is affordable before heading to a dealership first. Knowing what kind of vehicle is desired will make it easier to research and find the best deals to suit your individual needs. Once a particular make and model is chosen, it is generally useful to have some typical going rates in mind to enable effective negotiations with a car salesman. This includes talking to more than one lender and getting quotes from several different places. Car dealers, like many businesses, want to make as much money as possible from a sale, but often, given enough negotiation, are willing to sell a car for significantly less than the price they initially offer. Getting a preapproval for an auto loan through direct lending can aid negotiations.
Credit
Credit, and to a lesser extent, income, generally determines approval for auto loans, whether through dealership financing or direct lending. In addition, borrowers with excellent credit will most likely receive lower interest rates, which will result in paying less for a car overall. Borrowers can improve their chances to negotiate the best deals by taking steps towards achieving better credit scores before taking out a loan to purchase a car.
Cash Back vs. Low Interest
When purchasing a vehicle, many times, auto manufacturers may offer either a cash vehicle rebate or a lower interest rate. A cash rebate instantly reduces the purchasing price of the car, but a lower rate can potentially result in savings in interest payments. The choice between the two will be different for everyone. For more information about or to do calculations involving this decision, please go to the Cash Back vs. Low Interest Calculator.
Early Payoff
Paying off an auto loan earlier than usual not only shortens the length of the loan but can also result in interest savings. However, some lenders have an early payoff penalty or terms restricting early payoff. It is important to examine the details carefully before signing an auto loan contract.
Consider Other Options
Although the allure of a new car can be strong, buying a pre-owned car even if only a few years removed from new can usually result in significant savings; new cars depreciate as soon as they are driven off the lot, sometimes by more than 10% of their values; this is called off-the-lot depreciation, and is an alternative option for prospective car buyers to consider.
People who just want a new car for the enjoyment of driving a new car may also consider a lease, which is, in essence, a long-term rental that normally costs less upfront than a full purchase. For more information about or to do calculations involving auto leases, please visit the Auto Lease Calculator.
In some cases, a car might not even be needed! If possible, consider public transportation, carpool with other people, bike, or walk instead.