You can pay off a car loan more quickly by refinancing, dividing payments into two weeks, making a sizable down payment, making additional payments, or making cost reductions.
Your car payment is likely one of your biggest monthly expenses. Even with one of the best auto loan rates, you can still save a lot of money by figuring out how to pay off your loan faster. The Guides Auto Team will offer you methods for paying off your car loan early and explain whether doing so is appropriate for your financial circumstances.
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Ever felt like you’re stuck in an endless cycle of car payments? You’re not alone. The average American car loan stretches over six years, which means years of monthly payments and interest accruing on your loan. But what if you could break free from this cycle and pay off your car loan faster?
The good news is, it’s totally possible. With the right strategies and a bit of financial discipline, you can shave months, even years, off your car loan and save yourself a significant amount of money in the process.
Should You Pay Off Your Car Loan Faster?
Before diving into the how let’s address the “why.” Is paying off your car loan faster always the best option? Not necessarily. It depends on your individual financial situation and goals.
Here are some circumstances in which it might be wise to pay off your auto loan more quickly:
- You have extra cash: If you’ve received a bonus, tax refund, or unexpected windfall, putting it towards your car loan can significantly reduce your debt.
- You want to be debt-free: Getting rid of debt can be a huge weight off your shoulders and free up your budget for other goals like saving for a down payment on a house.
- You have a high-interest rate: If your car loan has a high interest rate, you’re paying more in interest charges over time. Paying it off faster can save you a lot of money in the long run.
But there are other circumstances in which it might not be the best idea to pay off your auto loan sooner:
- Your lender charges a prepayment penalty: Some lenders penalize you for paying off your loan early. Make sure the interest savings outweigh the penalty before making extra payments.
- You have other high-interest debt: If you have credit card debt or other loans with higher interest rates, it’s generally better to focus on paying those off first.
- You can’t afford it: Don’t sacrifice your emergency savings or essential expenses to pay off your car loan faster.
The choice of whether or not to pay off your auto loan more quickly is ultimately a personal one. Weigh the pros and cons carefully before making a decision.
5 Ways to Pay Off Your Car Loan Faster
Now, let’s get down to the nitty-gritty. Here are five effective strategies you can use to pay off your car loan faster:
1. Refinance Your Car Loan
Taking out a new loan with a shorter term or lower interest rate is what refinancing your car loan entails. This can drastically lower both the total amount of interest you pay over the course of the loan and your monthly payments.
However, refinancing isn’t always the right move. Make sure you shop around for the best rates and compare the new loan terms to your existing loan before making a decision.
2. Make Biweekly Payments
Instead of making one monthly payment, consider making two smaller payments every two weeks. This might seem like a small change, but it can actually save you a significant amount of money over time.
You will end up paying an extra month’s worth of expenses annually if you pay every two weeks. This can reduce the number of months on your loan and save you money on interest.
3. Round Up Your Payments
To accelerate the payoff of your auto loan, you can also round up your monthly installments to the closest $50 or $100. By making this tiny payment increase, you can shorten the length of your loan and reduce your interest costs.
For example, if your monthly payment is $350, rounding it up to $400 would add an extra $600 to your annual payments. This could shorten your loan term by several months and save you hundreds of dollars in interest.
4. Find Extra Money for Payments
Look for ways to free up some extra cash in your budget that you can put towards your car loan. This could involve cutting back on unnecessary expenses, selling unused items, or taking on a side hustle.
Even a small increase in your monthly payment can make a big difference over time. For example, if you can find an extra $50 per month to put towards your car loan, you could shorten your loan term by several months and save hundreds of dollars in interest.
5. Review Your Car Add-Ons
When you financed your car, you might have been persuaded to add on extras like GAP coverage, extended warranties, or tire and wheel protection. While these add-ons might seem like a good idea at the time, they can actually increase the cost of your loan significantly.
Review your loan paperwork and see if you’re paying for any add-ons that you don’t need or want. You might be able to cancel these add-ons and get a refund or credit for some of the payments you’ve already made. This can free up some extra money that you can put towards paying off your car loan faster.
Frequently Asked Questions
How fast can you pay off a car loan?
There’s no one-size-fits-all answer to this question. It depends on your loan amount, interest rate, and how much extra you can afford to pay each month. However, by following the strategies outlined above, you could potentially pay off your car loan in as little as half the time.
What happens when you pay off your car?
Once you’ve made your final car payment, the lender will send you a new title in your name or a statement of lien release, depending on your state. This means that the car is now officially yours and you are no longer obligated to make payments.
Is it better to pay principal or interest on a car loan?
Whenever possible, you should focus on paying down the principal of your car loan. This is the amount of money you originally borrowed, and it’s what accrues interest over time. By making extra payments towards the principal, you’ll reduce the amount of interest you have to pay and shorten the life of your loan.
Paying off your car loan faster can save you a significant amount of money and free up your budget for other goals. By following the strategies outlined in this guide, you can develop a plan that works for you and achieve your financial goals faster.
Remember, paying off debt is a marathon, not a sprint. Be patient, stay disciplined, and you’ll reach the finish line in no time.
Should You Pay Off Your Car Loan Faster?
Determining whether it’s a good idea to pay off your car loan early is the first step in the process. Eliminating your auto payment may seem like a big benefit, but it’s not always the best financial move.
How To Pay Off an Auto Loan Faster: The Bottom Line
For many people, ending car payments can be a game-changing financial move. You have numerous options at your disposal for accelerating the repayment of your auto loan. Regardless of the approach you take, make sure you are in a position to profit from early repayment of the remaining balance on your auto loan.