Make Half Of Your Monthly Payment Every Two Weeks
One option to repay your car loan early is to divide your monthly payment in half, and make those payments biweekly. This way, you’ll make 26 half-payments over the course of the year, or 13 full monthly payments.
This method might not seem like it would make much of a difference. But you’ll end up with an additional payment per year, shortening your overall term length by several months. You may also save a bit of money in interest.
You Get Ownership Sooner
This is self-explanatory as when youâre done paying a loan you take ownership of whatever the item the loan was intended for, but this has a deeper meaning. It means that the vehicle title will be in your name and you have the option to sell it privately or trade it in to a dealership. Your lender may have had a minimum insurance policy, so now that youâve paid the loan you can opt for less coverage and a less expensive insurance premium.
How To Accelerate Debt Repayment
After thinking about how to pay off their auto loan early, Lenz and his family set up an aggressive repayment strategy. Because the car loan was a priority to them, they juggled some of their other financial contributions. They did the math and decided it was worth it to cut back on contributing to their retirement and kids education funds.
They also looked around their home for things they could sell for extra money to use for payments. They sold toys, clothes and household items on sites like Craigslist to make more money.
Lenz advised look around and figur out what you have that you dont use.
People have hundreds or thousands they dont use, and that can give you a good start, he said. It can give you enough momentum to build the habit of thinking about paying off debt.
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Should I Consider Paying My Car Loan Off Early
As you can see, there are potential benefits to paying off a car loan early but before you make any changes, consult your lender. Things may not be as straightforward as sending your bank a big check to call it a day. Some loan agreements have early payment penalties which would derail the whole purpose of paying off your loan early.
When To Consider Paying Off A Car Loan
This is a big financial decision and you should give it enough careful thought, just like you did when you first got the car loan. Consider paying off your car if:
- You can afford it. If you dont have any other major, more expensive financial obligations, paying off your car loan makes sense. Youll free up money in your budget to put toward other things. But if you dont have the cash on hand, you may want to explore other options.
- You dont have other outstanding debt. Look at your budget, including how much you bring in and what youre paying out. If you want to save on total interest, you may have other types of debt thats a bigger obligation. Credit cards or personal loans often have higher interest rates than car loans, which means you may want to direct extra financial resources there.
- Youre saving for a big purchase. A car purchase itself is a major financial decision, but if youre trying to save for a home, lowering your DTI ratio and boosting your cash on hand is a big deal. You can do that through paying off your car loan early.
Not everyone has the financial power to pay off a car loan early. If you dont have the funds to do so, you may want to look into other options. Refinancing your car loan gives you the chance to lower your interest rate and reduce how much interest you pay over the life of the loan. But it could also extend your monthly payments, so its important to choose a financial path that fits your situation.
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How To Determine Your Potential Savings
Lenz and his family focused on paying off the car loan as soon as possible and paid it off in three years. That was well ahead of their scheduled repayment date, helping them save more money.
Even at such a low interest rate, Lenzs family saved money by paying off their car loan early. For example, if you had the average car loan of $32,480 for the average 69-month term at 2.19%, youd pay back $34,598 in total thats about $2,118 in interest.
If, like Lenz, you decided to accelerate your repayment and pay off your debt in 36 months instead of 69, however, youd pay back just $33,588. By making extra payments, you could potentially save over $1,000 in interest. You can use this calculator to run the numbers on your own loan:
Potential Credit Score Reduction
the mixture of different kinds of credit accounts, such as revolving debt and installment loans, on your credit report makes up 10% of your FICO credit score. Paying off your car loan closes an installment loan, which could throw off the mixture if you have on your credit report.
Throwing off this balance could result in a slight reduction.
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Can I Pay Off My Car Loan Early
Generally yes, youre allowed to pay off your car loan early. In fact paying off your loan early can cut down on the total cost of your car, because theres less time for interest to compound on your loan. However, loans with pre-computed interest ensure that lenders get their full interest payment, regardless of how soon you choose to pay off your loan. In these cases, early repayment can only get you out of debt faster, but youll pay the same total amount either way.
Should I Pay Off My Car Finance Or Refinance
There are many reasons why you might consider paying off your car finance before the end of your agreement, but you need to be confident that you can definitely afford to pay out the required amount. If youre not sure, its worth carrying on with your payments or seeing if an alternative option, such as refinancing, could be more suitable.
If your , you may be able to refinance your car loan to a new agreement with a lower interest rate. Check what rates you are eligible for before you apply to refinance. If you can get a better rate, you could choose a term that suits you, while making sure your monthly payments are an amount you can afford.
There is also the option of taking out a personal loan to pay off your car finance. You could use the loan to pay your settlement figure, which would then make you the legal owner of the car. You would then need to make your loan repayments each month and there would be no option to return the car.
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How To Save Money By Paying Off Your Car Loan Faster
EXPECTED READ TIME:9 minutes
Get-behind-the-wheel-quickly promotions have made it easier than ever to buy a car or truck. Theyve also created a financial dilemma for many American motorists.
Today, auto loans represent the third-largest source of debt among U.S. households, according to a report by the Federal Reserve Bank of New York, trailing only mortgages and student loans. Yet unlike mortgages and student loans, your asset your car actually depreciates instead of making you more money over time.
The good news is, paying off your vehicle loan early is one way to help reverse this trend. You can save money over the life of the loan, decrease your debt-to-income ratio, and free up monthly income.
That said, timing is everything. Well help you weigh the pros and cons to determine if and when you should pay off your car loan.
Switch To Biweekly Payments
Biweekly payments simply make more sense for the average worker, who gets paid biweekly. You can schedule your payments to coincide with your paychecks.
Specifically, split your monthly payment in half and set up automatic payments every two weeks. It may seem like youd just be paying the same amount each year. But you really make 26 half-month payments each year, or 13 months worth of payments each year rather than 12.
You get to pay off your car loan early without even noticing the impact on your monthly budget.
You could also pay more than a half-month payment every two weeks to pay off your loan even faster.
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Turning A Liability Into An Asset
When you owe money on a car loan, your car is more of a liability than anything. However, once you pay off the vehicle and the lender releases the title to you, the vehicle is now an asset.
You can sell the vehicle and keep 100% of the proceeds or use it as a trade-in on a new car if needed. You can even borrow against its value if you ever hit a tough spot financially.
Save Money On Interest
Unless you have 0% financing, youâll be paying interest for the entirety of your loan term. Therefore, if youâre able to pay off your car loan before the loan term ends, youâll be able to save money on interest. Even if you canât pay off the car loan in full right away, making extra payments here and there until the loan is entirely paid off is smart.
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Pursue Methods To Pay Down The Principal
As weve mentioned, if you have a simple-interest loan, you can pay it off more quickly by making additional payments toward the principal. Because youll pay off the principal faster, youll pay less interest and reduce the overall cost of the loan.
Heres how to pay off your car loan faster by making extra payments toward your principal balance.
Make biweekly payments
If you change the frequency of your payment to every two weeks, rather than once a month, youll make one extra payment every year.
Heres how it works. Divide your monthly car payment in half, and make that payment every two weeks. Youll be paying 50% of your payment 26 times a year, which works out to 13 monthly payments over 12 months.
This technique will also reduce your interest payments over the life of the loan, as youre decreasing your remaining balance at a faster rate.
Round up your car loan payments
Another way to slightly increase your payment schedule is to round up your payment to the nearest $50. For example, if you borrowed $13,000 at a 5% interest rate for 72 months, your monthly payment is $209. On a regular payment schedule, youll pay $2,074 in interest over the life of the loan.
If you round that payment up to $250, youll pay the loan off at least 13 months earlier and save at least $395 in interest.
Determine Your Current Balance And Payoff Penalties
The first step when planning on how to pay off your car loan faster is to look at the details of your loan. Some lenders make it difficult to pay off car loans early because theyll receive less payment in interest. In the best-case scenario, your loan was calculated using simple interest, which means your interest payment is based on your loans outstanding balance. If you pay off the loan early, youll make fewer interest payments.
If your lender does allow early payoff, ask whether theres a prepayment penalty. Some lenders will impose a fee for early payoff, which could reduce any interest savings youd gain by paying the loan early.
Then, check your balance and make sure that any extra payments go toward the principal of the loan. Some financial institutions will automatically apply additional payments toward interest or other fees rather than toward reducing the principal. You may have to specify that a transfer or a check is a principal-only payment, so run it with your lender first.
Calculate how much youll save
After youve figured out how much you owe and whether your lender imposes prepayment penalties, use an auto loan calculator to determine how much youll save if you pay off the car loan early. If there are prepayment penalties, they can negate any savings.
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When It Makes Sense
Although everyones situation is unique, shortening your car loan repayment period makes the most sense when:
- Youre in good shape financially. Think about whether you have enough money to cover bills, day-to-day expenses, and savings contributions. If paying off your loan early wont interfere with other financial needs, then it might be right for you.
- You have extra funds. Whether you receive a work bonus, tax refund, or some other influx of cash, you could put it toward paying off your loan. After all, you probably werent planning on having this extra money, so it wont affect your budget.
If you have credit cards, personal loans, and other debt with higher interest rates than your car loan, you should probably focus on paying those off first.
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
It could help when it improves your debt-to-income ratio . Lenders often look at DTI as a way to judge your ability to take on and pay off loans. Having a completed installment loan on your credit history could work in your favor whenever you want to apply for another loan, 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 tabulate open credit accounts as a greater positive toward your credit score than closed credit accounts. And without another installment loan, such as a mortgage, student loan or personal loan, youll limit your credit diversification. Even if your credit score dips slightly from paying off your car loan, it may be worth it if you have a high-interest loan. You can check your credit score here.
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Should I Pay Off My Car Early
9 Min Read | Sep 24, 2021
If youre living paycheck to paycheck and feel like as soon as money comes in, it goes right back out, its time to ask yourself: Which payments can I get rid of first?
For starters, you might want to look in your driveway!
Paying off your car might not be the first thing that comes to mind when you look at your budget, but if you have a car payment, its really stealing from your income.
Over the past decade, car debt has gone up 60%, and the average car payment is now $545!1,2
Im sorry . . . What?
If you invested that much money every month for the next 40 years, you would have $5.2 million. I mean, I like my car too, but not that much!
Most people want a nice car, and I get that. You dont want to drive around in something you arent proud of or that feels like its going to break down every time you drive it. Neither do I. We all want to drive a car we love and one thats safe and reliable. But you dont need to be in car debt to have that.
Refinance Your Car Loan
A car loan refinance means taking out a whole new loan, so it’s probably not worth it if your loan has a competitive annual percentage rate and you’re happy with your monthly payment and term.
But here are a few situations where a refinance might be a good choice:
If interest rates have significantly fallen since you took out your loan, you could get a lower APR, which would mean more of your payment goes on your principal so you’ll pay off your loan faster.
If your income has gone up, you may be able to afford a higher monthly payment.
On the other hand, if your income has gone down, you could refinance and get a longer term so your monthly payment is more affordable. Though this means you’ll pay more total interest, it could be worth it for peace of mind each month.
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How To Pay Off An Auto Loan Early
Relying on a car loan to buy a vehicle can be an expensive gamble. The average amount customers borrow for a new car is $32,480, according to LendingTree, and the average monthly car payment is $550 over 69 months with 8.06% APR. If you have other forms of debt, such as student loans or credit cards, thats a large chunk of your income to spend on another loan.
If you borrowed the average amount of $32,480 and had a 69-month repayment term at 8.06% interest, youd pay $8,213 in interest. Thats an extra $8,213 you could have used to pay for other goals, such as paying down debt, building an emergency fund or even planning a vacation.
The thought of wasting extra money on interest was a wake-up call for Lenz. Even though he had a low interest rate of 2.19%, Lenz is a Dave Ramsey fan. And according to Ramsey, debt any debt at all is an emergency that requires immediate action.
With that mindset, Lenz felt like the loan was a drag on family resources.
For two years, we didnt do anything to accelerate payments, he said. We just paid our regular payments every month. Something just clicked about six months ago. When I looked at the numbers, I saw that if we used our extra money like what we put towards savings we could hammer out the loan in a short time.
Avoiding interest charges and having one less financial obligation was a major motivator for Lenz and his family.