Other Uses For The Cash
Sometimes, the excitement of paying off your car overshadows other places that money could help. For example, if you have high-interest debts, like credit cards or personal loans, it’s likely better to pay off those debts first.
If you have no other debt, maybe this cash could go toward building your emergency fund or reaching other personal finance goals.
Save On The Interest You Pay
The interest you pay on an auto loan is spread over the loan term. Part of your monthly car payment goes toward paying principal, the lump sum you borrowed, and part to paying the loans interest.
Most auto loans use simple interest, so the interest amount you pay monthly is based on the principal amount you still owe. Therefore, when you pay more than your required monthly auto loan payment, youll want to ensure the extra funds go toward paying the car loan principal. Doing this reduces the interest you owe and shortens your loan term.
For example, if you took out a $30,000 auto loan with a 6% interest rate and 60-month term, your monthly payment would be $579.98 and the total interest you pay would be nearly $4,800. However, if you paid an extra $100 a month for the life of the loan, you would pay it off in 50 months and save around $800 in interest.
Of course, its unlikely that most people will pay extra monthly throughout the loan term, but paying extra toward the principal now and then can still save you money. You can use NerdWallets auto loan extra payments calculator to see how paying more could reduce your auto loan interest and term.
The Thought Of Paying Off Your Car Loan Early And Doing Away With Your Monthly Payment Is Appealing But Should You Do It
Maybe you have a little extra cash each month, or you recently came into a large amount of money. Should you use those funds to pay off your car loan early? There are potential benefits, but also some possible drawbacks, to consider when deciding whether to pay off your auto loan ahead of schedule.
Don’t Miss: How To Get Out Of A Car Lease
Paying Off Your Car Loan For Credit Repair
If is your goal, a slow and steady repayment plan suits this situation. Payment history is the biggest part of what makes up your credit score, so the more consistent, on-time payments you can show, the better. This goes for all your bills, not just your car loan.
This doesnt mean stretching your loan out longer to make more payments. Just keep paying as your contract states and keep up with your other payment obligations, too.
Should You Pay Off Your Car Loan Faster: Checklist
To help you decide whether or not it makes sense to wrap up your auto loan early, weve created a checklist. If you check most or all of the items on this list, its worth looking into how you can pay off your car loan faster:
- You can save a significant amount of money by paying off your loan early.
- You can achieve other financial goals by eliminating your loan payments.
- You can afford to make larger payments or one large payment.
- Your loan doesnt have a prepayment penalty.
- You dont have other debts with higher interest rates.
- You can refinance your loan without too much additional cost.
You May Like: What Happens When An Insurance Company Totals Your Car
Top Credit Card Wipes Out Interest Into 2023
If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR into 2023! Plus, youll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read The Ascents full review for free and apply in just 2 minutes.
Also Check: How To Refinance An Avant Loan
Option : Add Windfalls To The Loan
Every once in a while, unexpected money falls into your lap. This may come as a tax refund, a bonus from work or a rebate from an item you purchased.
When you get a windfall, put the extra cash toward the principal balance of the car loan. You can either put the entire lump sum toward the loan or divide it between other goals, like a vacation or home remodel. If you feel like splurging, put 90% towards your debt and use the remaining 10% to go shopping or treat yourself to a nice dinner.
Windfalls are great because theyre often a surprise, so they feel like bonus money. If you put a windfall immediately toward the auto loan, you wont have time to ponder how else you could spend the extra money.
If youre paying extra on your auto loan, make sure the funds are going toward the principal and not just interest or other fees. You may have to call the lender directly and ask them to apply the funds this way. If you pay via check, you should write principal on the memo portion.
You May Like: Is Car Insurance Cheaper If You Own The Car
Pay Off Your Car Faster With A Refinanced Loan
If high-interest rates are keeping you from quickly paying down your vehicle principal, the best solution may be to refinance your auto loan with Greater Texas Credit Union.
Offering a host of unique benefits, low-interest rates, and no prepayment penalties, our custom auto loans are a quick and efficient method of paying down existing car debt all within a time frame that suits your lifestyle best.
Interested in seeing what Greater Texas Credit Union can do for your car loan needs?
Ways To Pay Off A Loan Early
If youâre like most Americans, you owe money toward a large loan. Whether that means carrying thousands of dollars in credit card debt, having a hefty mortgage in your name or making car loan payments each month, loan debt is part of your life. This means youâre looking at hundreds of dollars in interest payments over the life of the loan. Thereâs also the mental load of knowing you owe perhaps tens of thousands of dollars and that youâll be paying back the loan for years to come.
It can all get kind of depressing-but it doesnât have to be that way.
Did you know there are simple, but brilliant, tricks you can employ to lighten the load? With a carefully applied technique, you can pay off your mortgage, auto loan, credit card debt and any other debt youâre carrying quicker than you thought possible. These tricks wonât hurt your finances in any dramatic way, but they can make a big difference to the total interest youâll pay over the life of the loan and help you become debt-free faster.
You can free up more of your money each month, use your hard-earned cash for the things you want instead of forking it over in interest and live completely debt-free sooner than youâd dreamed. Itâs all possible!
A note of caution before we explore these tricks: Check with your lender before employing any approach, as some loan types have penalties for making extra or early payments.
Recommended Reading: What Does Comprehensive Car Insurance Mean
Put All Windfalls Toward Your Car Loan
We all occasionally collect a one-time windfall. They come in the form of things like tax refunds, work bonuses, gifts, and inheritances.
If you dont want to change your monthly budget in the slightest, you can put all lump-sum payments toward paying down your loan balance. Just ensure you stay disciplined and do it rather than succumbing to the temptation of putting it toward a new TV or a vacation instead.
How Do I Pay Off My Car In Full
First, take your lowest amount of debt or your highest-interest debt and gather up enough funds to pay it off. Next, take the amount of money you paid toward that debt and apply it to your next debt payment until it is paid off. Finally, take the full amount you paid and apply that to your next debt payment.
Don’t Miss: What Is A Drift Car
When Does Paying Off A Car Loan Early Make Sense
There are a few instances where it may make better sense to start focusing your efforts on settling that auto loan faster. Below is a list of some qualifiers that may ease the decision-making process for you:
- When your auto loan has a higher interest rate than what you could earn with investments.
- When you do not have higher-interest debt and plan on freeing up the cash to achieve other financial goals.
- When you plan to purchase a house soon and want to lower your debt-to-income.
- You are generally averse to having debt, and settling your auto loan means you – will achieve financial security.
- If you have recently received a windfall amount and now have enough excess cash in your savings for emergencies.
Consider How Paying Off A Car Loan Early Affects Your Credit
Paying off your car loan completely could help or hurt your credit, depending on certain factors.
When paying off a car loan helps your credit
Early loan payoff can help your credit scores by improving your . The less debt you owe, the more likely your scores are to improve. Lenders prefer borrowers with a low credit utilization ratio, which is seen as a sign that you can manage repayments responsibly without using up your available credit.
Lenders also look at how much debt you owe in comparison to your income, or your debt-to-income ratio, as a way to judge your ability to take on new loans. Having fewer debt payments, along with a completed installment loan and a history of on-time payments, could work in your favor whenever you want to apply for new financing, such as a home mortgage.
When paying off a car loan hurts your credit
It could hurt your credit score, however, if you lack another type of open installment loan. Lenders tend to look favorably on current credit accounts that are in good standing than closed credit accounts. And without another installment loan, such as a mortgage, student loan or personal loan, youll limit your credit mix, which makes up 10% of your FICO credit score.
You May Like: How To Get Rid Of Scrapes On Car
Ways To Lower Your Monthly Car Payment
Aside from refinancing your loan, there are two ways to lower your monthly payment: defer them or request a loan modification.
Deferment allows you to skip a payment if you are experiencing short-term financial hardship. Lenders may offer one to three months of deferment to help you out. But deferment only moves the payments to the end of your loan, so you will still have to make them up eventually. You will also be responsible for interest, so in the end, it is more expensive.
Lenders may be less willing to modify your loan, but it doesnt hurt to ask. Much like refinancing, loan modification will change the terms of your loan by either extending your term or lowering your interest rate. If you can get a modification to your loan, you could reduce your monthly payment without having to apply with a new lender.
Another Way To Save On Interest Without Paying Off Your Car Loan
Refinancing your car is another option if you simply want to reduce the interest on your auto loan without paying it off early. You may be able to refinance to a lower loan rate if your credit has improved or car loan rates have dropped since you took out your original loan. But be aware that refinancing to a longer term could increase the total interest you end up paying.
About the author:Shannon Bradley covers auto loans for NerdWallet. She spent more than 30 years in banking as a writer of financial education content.Read more
Read Also: What To Look For When Buying A Car
Shop For A Lower Car Insurance Rate
If you havenât shopped around for cheaper car insurance in the past couple years, itâs time to review your policy and get quotes from other carriers.
If youâre happy with your current company, talk to your insurance agent about different strategies to lower your car insurance premium. Review all available discounts and evaluate the possibility of increasing your deductibles and/or lowering your coverage. Keep in mind that changing those factors will lower your premium, but if thereâs an incident, youâll be responsible for more out-of-pocket costs. Take a balanced approach.
If youâre open to change, get quotes from two or three other insurance carriers. Try your best to get quotes on the same coverage from each company so itâs easy to comparison shop.
Consider working with an independent agent to speed up the process of getting quotes and lowering your costs. Independent agents contract with multiple insurance companies.
When Youre Better Off Financing The Car
You dont have enough cash to pay the full price.
Obviously, if you dont have all the cash needed, youll have to turn to financing.
It might still be better to make a minimum down payment to preserve at least some of your cash.
When paying cash will leave you broke.
Owning a car free and clear will certainly be a good feeling. But it may be offset if youre left with an empty bank account.
Theres a strong sense of comfort and confidence that comes from having money in the bank. You dont want to leave yourself in a weakened position because of the car youre driving.
You can earn more on your investing activities then youll pay in interest on the car loan.
If you can get a car loan at 5%, and youre earning 7% on your investments, financing will make abundant sense.
Just as important, at the end of your loan term when your car is paid, youll still have your investment portfolio plus the investment income you earned on it while you were paying off the car.
The interest rate on the loan is so low its almost like paying cash.
Some lenders are offering rates on car loans that are too good to pass up.
If you have an opportunity to get a loan for say, 2.99%, that will be very close to paying cash.
For example, if you take a $25,000 loan for five years at 2.99%, youll pay a total of $26,946 in payments. $1,946 of that will be interest.
Over five years, thats less than $400 per year.
You can earn close to that interest rate with CDs offered by online banks.
Also Check: How To Remove Hard Water Spots From Car Windows
How To Use This Car Loan Payoff Calculator
To use the calculator, make sure you have the following information available:
- Vehicle purchase price: This is the amount you financed to purchase your vehicle.
- Loan term: The amount of time over which you agreed to pay back the amount you borrowed. For example, 60 months is a common auto loan term.
- Annual percentage rate : This is the auto loan interest rate you agreed to pay, expressed as an annualized percentage, including any applicable lender fees.
- Remaining months: The number of months you have left on your loan.
- Increased monthly payment: The amount you want to increase your monthly car payment .
- Current monthly payment: This is how much youâre currently paying toward your loan every month.
- Loan term shortened by: The number of months your loan would be reduced by if you increased your payment amount.
- Total interest savings: The amount youâll save in interest if you make the additional payments suggested by the calculator.
We Found Ways To Earn More
Over the course of the next 18 months, my wife and I increased our income via eight different sources. These included improving our income in our full-time jobs through professional development and position changes, as well as picking up part-time jobs, contract work, and starting our own businesses.
As a teacher with summers off and a therapist who sets her own schedule, one thing we did have going for us was time and flexibility to build these new income streams and sustain them for a short period of time. My wife worked at a vineyard and took on a part-time school social work position. I wrote curriculum for my school district and started tutoring math in the evenings.
My favorite side hustle was officiating girls’ lacrosse. While being the one in the center of the field with the whistle may not sound appealing to you, this was a way that I could make a great hourly rate of about $1 per minute, plus it had exercise built in.
You May Like: How To Paint Scratches On Car
Refinance Your Car Loan
When you refinance your car loan, the old debt is paid off by the new lender and the new lender issues a new loan with different terms.
There are several ways to save money over the life of the loan when refinancing: You can get a lower auto refinance interest rate and keep the same loan term. You can shorten the loan term to pay it off even faster, but that usually comes with a higher monthly payment.
Bad credit? On-time payments can improve your credit score, so if you didnt qualify for a great rate at the dealership, try again in a few months. Shop around with multiple banks and credit unions or try an auto refinance marketplace with a large lender network to do the work for you.
Owing A Prepayment Penalty
Prepayment penalties arent as common as they used to be, but some lenders still charge a fee if you pay off a car loan early. Review your loan agreement to see if a prepayment penalty applies. If it does, determine whether the amount you will save in interest is greater than your cost of paying off the car loan sooner.
You May Like: What Kind Of Car Battery Do I Need
