Given that two-thirds of new auto loans now last six years or longer, according to Experian data, there’s a good chance your financial situation has changed since you purchased your vehicle. Perhaps you bought your car flush with the excitement of landing your first entry-level job. Now youre a manager with a bigger salary and an annual bonus. Should you pay more on your car payment if you have extra cash on hand? In many situations, you can pay more on your car payment, but before you do, make sure you fully understand the effects it will have on your credit score, your auto loan, and your personal finances.
Doubling your car payment can be a smart move, but it’s important to understand the pros and cons before you commit. Here’s a breakdown of what you need to know:
Pros:
- Pay off your loan faster: This is the biggest benefit. By doubling your payments, you’ll significantly reduce the time it takes to pay off your loan, which can save you thousands of dollars in interest.
- Build equity faster: As you pay down your loan, you’ll build equity in your car. This means that you’ll have more ownership in the vehicle, which can be helpful if you need to sell it or trade it in down the road.
- Improve your credit score: Making consistent on-time payments is one of the best ways to improve your credit score. Doubling your payments will show lenders that you’re a responsible borrower, which can help you qualify for lower interest rates on future loans.
Cons:
- Increased financial burden: Doubling your payments will obviously increase your monthly expenses. Make sure you can afford the extra cost before you commit.
- Early payoff penalties: Some lenders charge a penalty if you pay off your loan early. Be sure to check your loan agreement before you make any extra payments.
- Missed opportunities: Doubling your car payments means you’ll have less money available for other expenses or investments. Consider whether there are other ways you could use the extra money that would be more beneficial.
Here are some additional factors to consider:
- The interest rate on your loan: If you have a high interest rate, doubling your payments will save you more money on interest.
- The length of your loan term: If you have a long loan term, doubling your payments will have a bigger impact on the total amount of interest you pay.
- Your financial goals: If you have other financial goals, such as saving for a down payment on a house or investing for retirement, you may want to prioritize those goals over doubling your car payments.
Ultimately, the decision of whether or not to double your car payments is a personal one There is no right or wrong answer, and the best choice for you will depend on your individual circumstances.
Here are some additional resources that you may find helpful:
- Bankrate Car Loan Calculator: https://www.bankrate.com/loans/auto-loans/car-loan-calculator/
- NerdWallet Car Loan Calculator: https://www.nerdwallet.com/mortgages/car-loan-calculator
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/topics/auto-loans/
What to Consider Before Paying Extra
Before you pay extra on your car loan, however, its important to consider these questions:
- Do you have the option to make additional payments? Some auto lenders completely forbid early repayment. Some impose prepayment penalties, which can wipe out any money you save by making additional payments. Find out what your loan terms permit by contacting your lender.
- In general, auto loan interest rates are fairly low compared with, say, credit card debt. Do you have other, higher interest debt? For instance, the average interest rate on credit cards is currently 17. 86%, while the average interest rate on a new car loan with a 60-month term is 204 73%. Prioritize paying off high interest debt before taking on low interest debt if you have extra money.
- How will additional car payments impact your spending plan? Ensure that the additional payments won’t push your spending plan over the edge. If you find yourself short on cash, you may be tempted to charge high-interest items to your credit card.
- Is there a more productive way you could use this money than making extra payments on a car loan? It depends on your needs now and in the future. For example, you may want to start saving for a down payment on a home, increase your 401(k) contribution, or accumulate an emergency savings fund.
How Paying Extra on Your Car Loan Payments Works
Make sure your lender applies the additional payments to the principal or the interest on your car loan before scheduling that extra payment.
It is best to apply additional payments directly to the principal, or the amount you borrowed, as this lowers your overall interest rate as well as the amount you owe. (The exception: Regardless of how quickly you pay off the loan, you will always pay the same amount of interest if your loan has precomputed interest, which means the total interest was determined and fixed based on the loan’s term. ).
However, many lenders dont apply your extra payment amount directly to the principal. Rather, it will be applied to the interest that has accumulated since your previous payment and only then to the principal.
Unfortunately, many auto lenders will treat an extra payment as an early payment of your next bill rather than applying it to the principal. What happens if you make a large extra payment rather than just a small additional amount to your monthly payment?
Find out exactly what your lender needs in order for the additional payment to be applied to the principal of your loan if that is your preference. It might be necessary for you to put your requests in writing, check a box online, or even send your additional principal payments to a separate address.
Paying Off Car Loan Early | Principal vs Extra Payment Explained
FAQ
Is it better to make 2 car payments a month?
Does making double car payments affect credit score?
Should I increase my car payments?
Should I pay extra on my car payment each month?
There are a couple of reasons you might want to pay extra on your car payment each month. You’ll pay less interest overall. If you have a 60-month, 72-month or even 84-month auto loan, you’ll pay quite a bit in interest over the loan term.
Can you pay extra on a car loan?
In most cases, you can pay extra on your car loan. By paying more than the minimum, it can help you pay off your car loan faster Extra car payments may not automatically go to the loan principal. They’ll most likely be applied to interest first unless you specify how to apply them with your lender How Does Paying Extra on Your Car Loan Work?
Can you pay off a car loan faster if you pay more?
By paying more than the minimum, it can help you pay off your car loan faster. But before you start throwing extra money at your loan, talk with your lender to make sure you’re allowed to. If you get the A-okay, decide how you want to pay extra: either by making a larger monthly payment or a payment in addition to your minimum monthly payment.
Should you pay double on a long term loan?
By paying double on the longer loan, you retain the flexibility to pay less. And you would pay less interest if you truly doubled your payment on the longer loan. This is because you’d be paying off more of the principal more quickly. (But you’d also be making a slightly higher payment than on the shorter term loan.)