With loans available for up to 96 months, the average length of time for a new car loan is just over 68 months, meaning you could be making car payments for eight years. Over the course of the loan, paying it off early can save you money because long-term financing entails higher interest payments.
Even though it could sound like a great idea, first make sure you understand the specifics of your loan and your financial situation.
The Short Answer: Paying an extra $50 a month on your car loan can save you thousands of dollars in interest and help you pay off the loan faster. However it’s important to make sure your lender doesn’t charge any prepayment penalties.
The Long Answer:
If you’re looking for ways to save money and get out of debt faster, paying an extra $50 a month on your car loan is a great option. Here’s how it works:
- Reduces the principal balance faster: When you make an extra payment, that money goes directly towards reducing the principal balance of your loan. This means you’ll be paying less interest over the life of the loan.
- Shortens the loan term: By paying an extra $50 a month, you’ll be making 13 payments instead of 12 each year. This effectively shortens the loan term, which means you’ll be debt-free sooner.
- Saves you money on interest: The less you owe on your loan, the less interest you’ll pay. Even a small extra payment can make a big difference over time.
Here’s an example of how paying an extra $50 a month can save you money:
Let’s say you have a $25,000 car loan at a 5% interest rate for 60 months. Your monthly payment would be $477.32. If you paid an extra $50 a month, you would pay off the loan in 48 months instead of 60 months. You would also save $2646.72 in interest.
Here are some things to keep in mind before you start making extra payments:
- Check for prepayment penalties: Some lenders charge a prepayment penalty if you pay off your loan early. This penalty can offset the savings you would get from making extra payments.
- Make sure you can afford it: Don’t overextend yourself by making extra payments that you can’t afford. Make sure you can still cover your other expenses and have some money left over for emergencies.
- Talk to your lender: Let your lender know that you’re planning to make extra payments. They can help you make sure the extra payments are applied to the principal balance of your loan.
Here are some additional benefits of paying off your car loan early:
- Improves your credit score: Paying off your car loan early can improve your credit score by showing that you’re a responsible borrower.
- Frees up cash flow: Once your car loan is paid off, you’ll have more money available to spend on other things, like saving for a down payment on a house or taking a vacation.
- Reduces stress: Being debt-free can give you peace of mind and reduce stress.
It’s a terrific idea to pay an extra $50 per month on your auto loan if you want to save money and pay off debt more quickly. Just make sure you can afford it and look into any prepayment penalties.
Here are some additional resources that you may find helpful:
- LendingTree: How to Pay Off Your Car Loan Faster
- FinanceBand: What happens if I pay an extra $50 a month on my car loan?
- NerdWallet: How to Pay Off Your Car Loan Early
Please note that this is just a general overview of the topic. If you want specific information about your loan, it’s always best to speak with your lender.
Make biweekly instead of monthly payments
By changing how often you make payments, you could make one extra payment a year. There are 52 weeks in a year, and not every month has four weeks. Therefore, you will essentially make one additional payment throughout the course of the year if you pay 20%50% of your car payment every two weeks. An illustration of possible savings using this method on a $25,000 loan at 6% APR with a two-month initial loan term is provided below.
| Monthly payments | Biweekly payments | |
|---|---|---|
| Payment amount | $414.32 | $207.16 |
| Payments in a year | 12 | 26 |
| Annual payment | $4,971.84 | $5,386.16 |
| Total interest paid | $4,831.20 | $4,335.54 |
| Interest savings | N/A | $495.66 |
| Payoff | 72 months | 65 months |
Round up your payments
Round up your payment to the next $50 or $100 each month. You set the amount, so you can vary it based on your cash flow for the month. If you do it consistently, you can cut months off the life of the loan.
If you borrow $25,000 at a 6% APR for 72 months, the monthly payment is $414. 32 per month. If you add $50 per month, you’ll shorten the loan term by 9 months and save $633. 42 in interest.
Paying Off Car Loan Early | Principal vs Extra Payment Explained
FAQ
What happens if I make 2 car payments a month?
Do extra payments automatically go to principal?
Will paying extra on a car loan lower my monthly payment?
Instead, you must speak with your lender directly and request that your car payment be applied to the principal loan balance. Even then, paying extra on your car loan won’t lower your next monthly payment. To reduce your monthly autoloanpayment, you’d have to refinance the loan with longer terms.
What happens if you pay extra on a car loan early?
Each month, a portion of your car payment goes to the principal and a portion to interest. At the beginning of the loan, a larger part of your payment goes to interest. So paying extra on the principal early in your loan will have the greatest impact on the overall amount of interest you pay.
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?
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.