How Paying Extra On Your Car Loan Payments Works
Before you schedule that extra payment on your car loan, you need to find out whether your lender applies the payments to your loan principal or to the interest.
Applying extra payments directly to the principal is ideal because it reduces both the amount you owe and your total interest.
However, many lenders don’t apply your extra payment amount directly to the principal. Instead, they’ll apply it first to the additional interest accrued since your last payment, and only then to the principal.
What if you make a whole extra payment instead of just adding a little bit more to your monthly payment? Unfortunately, many auto lenders will treat this as an early payment of your next bill instead of applying it to the principal.
If you want to make sure the extra payment will be applied directly to your loan principal, find out exactly what your lender requires to do so. You may need to specify your wishes in writing, check a box online or even mail your extra principal payments to a different address.
How Paying More On Your Car Payment Affects Your Credit
Paying more on your car loan affects your credit scoreand not necessarily in a positive way. Here’s what you need to know.
If you make an extra car loan payment once or twice, it probably won’t impact your credit score at all. However, if you consistently make extra payments and pay off your car loan early, it can actually hurt your credit scoreespecially if you’re just starting to build credit, don’t have many credit accounts or are trying to improve your credit score.
Once your loan is paid off, the account will be closed. Although closed accounts may show you successfully managed credit in the past, open credit accounts have a greater impact on your credit score because they show lenders how well you’re managing credit in the present. Your credit score also takes into account how long you have been using credit, so if your auto loan is your oldest credit account, closing it can hurt your credit score.
Finally, paying off your car loan could hurt your credit score if all of your other credit accounts have high balances. That’s because is a factor in your credit score. Find out more about how paying off a car loan early can hurt your credit score.
Considering Paying Off Your Auto Loan Early
Most auto loan lenders allow borrowers to prepay on the principal balance of their loan without a prepayment penalty. .
If you can manage to either increase your payments, or apply a lump sum toward the principal balance, you can consider doing so by using this calculator by crunching some numbers. Paying off the auto loan early or adding a prepayment amount each month, shortens the period of time that the loan is in place and also decreases the total amount of interest that you will pay on the loan in the long run. While it may be difficult to part with a larger sum up front, or adding an additional amount each month to your payment, paying off your loan early can potentially save you thousands of dollars overall.
- FAQ: An auto loan early payoff calculator like this one can help you figure out how much.
You May Like: How To Fix Clear Coat Peeling Off Car
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.
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.
Read Also: Can You Lease A Car With Carvana
Consider Refinancing Your Current Car Loan
If your car loan came with a high interest rate or other monthly fees, refinancing your auto loan could provide you with better terms and a lower payment if your credit score has increased since you applied for the loan .
As you look at options for refinancing, keep in mind that your goal is to pay off the loan quickly. Refinancing with a new 72-month loan is still a relatively long time 72 months is six years, more than half a decade. Instead, youll want to look at a shorter term say 60 or fewer months and a lower interest rate, if possible. If you do refinance for a long-term loan, consider paying extra toward the principal every month to pay off the loan more quickly.
Should I Pay Off My Car Loan Early Or My Mortgage
Question: If Ive got a little extra money that Id like to use responsibly to pay off one of my debts, which is the better one to put it towards: Should I pay off my car loan early or my mortgage?
Ahhh the old which of my debts do I pay down first debate
We tend to carry a lot of them in our society. According to a 2017 report from GoBankingRates, the top three forms of debt for most people are their mortgage , credit cards , and auto loans .
Usually questions like this are a no-brainer. Simply look to your loans with the highest interest rate and pay those off first. That means tackling your high-interest debt like credit cards and student loans.
But what about our auto loans and mortgages? When it comes to debts like these, the differences can be a bit more subtle. The interest rates are often lower, and the payments are more manageable .
All in all, debt is still debt! And the sooner you can pay it off, the quicker you can crawl out from underneath the mountain of interest that is building up on top of you.
But for these two types of loans, is that all there is to it? Are there are other implications to paying off your mortgage or car loan that can make one option more attractive than the other?
Don’t Miss: How Do You Get Carpet Beetles In Your Car
Using The Auto Loan Calculator
- This calculator uses your original loan amount, length of the loan and interest rate to calculate your current monthly payments. From there, enter the number of months left on the loan, then enter how much extra you’d like to pay each month to see how much sooner you’d pay it off.
You can adjust that figure using the slide bar to experiment with how varying the additional payment would affect how early you can pay off the loan and how much interest you’d save. Your results appear instantly at in the blue field at the top of the calculator and just below it at right as you adjust the extra payment figure.
- FAQ: Arm yourself with various scenarios that fit your budget goals
Start by entering the number of months remaining on your car loan, than enter the full length of the loan, in months. If you want to see the effect of making extra payments over the entire length of the loan, just enter the full length of the loan in both places. Next, enter the amount of the loan and the interest rate. The calculator will immediately display your regular monthly payment for the loan in the place indicated. Next, enter any additional amount you’d like to pay each month. The number of months you’ll shorten your loan by and your interest savings will appear at the top of the page.
Which Strategy Is Right For You
Some lenders wont let you pay down the principal, so refinancing to a loan with better terms may be the only way to pay off the car loan early. You could use our auto refinance calculator to see if refinancing is right for you.
Before you make a decision, its important to understand whether youll be charged a prepayment penalty. It doesnt make sense to pay off a loan early if doing so will cost you more. But if youre able to land a competitive term and interest rate on an auto refinance loan, you may be able to offset any fees imposed by your previous lender and save money.
If you have a simple interest auto loan without prepayment penalties and your lender will let you pay down the principal, it may make sense to stick with your current loan and work toward paying it off early.
You May Like: How To Get Rid Of Squirrels In Car Engine
How Much Faster Will I Get Out Of Debt By Making Extra Payments
This debt repayment calculator figures how much faster you will get out of debt and how how much interest you will save by adding an additional principal repayment to your next regularly scheduled payment.
If you have multiple debts to repay then try this Debt Snowball Calculator to repay faster using the rollover method. In addition, there are 10 other to choose from. One will certainly fit your debt repayment needs perfectly.
The Internet Has Changed Automotive Shopping
Research Before You Shop
After you have determined the car you want to buy, go to Edmunds.com to find the invoice price. Do not shop without this information in hand. It’s your leverage in the negotiating process. If you don’t have this piece of information, the dealer will work from the MSRP which is a much higher price. Consider MSRP as retail price and invoice price as dealer cost.
Never pay higher than invoice price. And don’t worry, the dealer still makes a profit. There is something called holdback which the manufacturer gives the dealer for each vehicle. It’s usually 2-3 % which they receive quarterly. At times the manufacturer also offers dealer incentives for specific models.
If you have looked ahead and planned your purchase, note that some times of the year are better than others to buy a car. Salesmen work on commission and have monthly, quarterly and yearly goals to meet. So buying at the end of one of these periods can save you money, especially if the salesman hasn’t hit his quota.
Get a Free Online Quote
If you have made a decision on the exact vehicle you want, visiting the dealership late in the day may work to your advantage because everyone is eager to go home. Aside from the information we provide here, you may want to read some personal stories of sale negotiations to better visualize and prepare yourself:
Don’t Miss: Equus Car Cost
What Is The Loan Principal
There are several moving parts in a car loan. The lump sum of money you borrow to pay for the vehicle is the principal. Youll also pay interest, which is what it costs to borrow the principal. The structure of auto loans varies depending on your lender: In general, part of each monthly payment goes toward both the interest and the principal.
When you ask a lender for money to buy a car, it evaluates your financial situation to make sure you can afford monthly payments that include the price of the car plus interest charges.
There are a couple of ways to reduce your loan principal
Sell Trade Or Try Transit
You might want to ask yourself an unexpected question: Do you really need a car? More narrowly, do you really need that specific car that youre driving?
If you live in a city with good local transit, you can save a lot of money not only on car payments, but gas, insurance and upkeep. Or, perhaps COVID has you working from home rather than commuting daily. If youre in a family with more than one car, maybe you dont need them all.
Recommended Reading: Who Accepts Synchrony Car Care
Your Money Might Be Better Used Elsewhere
Paying off your car loan early frees up a good chunk of extra cash to keep in your pocket. But its important to also look at how much youre paying monthly for other debts that might be costing you more. Which one has the highest interest rate? If your car loans rate is low compared to other types of debt, like credit cards, consider paying off the debt with the highest interest rate first. That way you save more on total interest owed.
Is It Worth Paying Off Car Finance Early
Paying off your car finance early is only really possible if youre in a comfortable position financially to do so. It means youll make big savings on the amount of interest you pay on your car finance deal. However, if youve got negative equity in your vehicle, then it might not be the best idea.
You May Like: Does Aaa Offer Car Shipping
How Do I Find Out My Car Loan Amortization Schedule With Extra Payments +
You can get an idea of your amortization schedule when you use our auto loan early payment calculator. You will be shown just how much you’ll be owing at any period in the life of the loan for both regular payments and accelerated payment plans that use extra payment.
Is there a ‘remaining car loan payoff calculator’? +
Yes, there is a remaining car loan payoff calculator. This auto loan early payment calculator provides you with accurate information about how much money you still have to pay off on a car loan. You will, however, need to supply details on the loan amount, period, and extra payment.
How to pay off car loan calculator faster? +
An auto loan early payment calculator helps you save money by making extra monthly payments. It works when you supply details of the loan term, loan amount, additional monthly payment intended, current payment, and interest rates. You then get a report on how much you save in terms of money and time on the loan.
Round Your Payments Up
This is the method we started using when we had our car loan. It may be tempting to only pay your monthly payment, but add a little extra to each payment. For example, if your payment is $292.54, round it up to an even $300. This will help you pay off your car loan quicker without putting too much of a strain on your finances. The extra money will general go toward your premium.
If you make payments online you will see you amount due each month go down but keep paying that $300, it’s a great feeling to see that payment keep going down and a great motivator!
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?
How Much Time And Money Will You Save By Adding An Additional One
Feel like you’re repaying your debts just fine? Think you have it together?
Watch out. You might be in for years and years of interest payments â unnecessary payments if you have the means to pay a large, one-time lump sum.
Related:5 Financial Planning Mistakes That Cost You Big-Time Explained in 5 Free Video Lessons
Using our Debt Repayment Calculator, run a scenario where you sell a car to put the money toward debt, forgo an expensive vacation for the dream of becoming debt-free, or use some inheritance money to wipe out those student loans. Whatever your scenario, let the Debt Repayment Calculator show you how much time and money you can save thus spurring you to action!
Don’t Miss: Car Interior Scuff Remover
Paying Your Car Loan Early To Avoid Interest
This may or may not be a wise financial decision. As you can see, the first thing to consider would be any penalties. If you’re not sure, you can call your lender and find out about that.
Then there’s the question of what’s the best use for that money. Paying off a loan to avoid paying the interest doesn’t make financial sense if it means you’ll have to go into more debt on another front.
Refinance Your Loan If You Can
Interest rates are constantly changing. If you had a high-interest rate when you bought your car, look into refinancing it at a lower cost. This is especially a good idea after you have made a few payments and raised your credit score. The lower your interest rate the more money you will save in the long run. But keep making your original payment even though the amount you owe each month will generally go down!
We find we get the best loan rates with Navy Federal and USAA as a military family so make sure to shop around!
What other ways have you found to cut your car loan payment in half? Share your mad skills in the comments below!
Also Check: How To Get Car Title In Florida Online