Bad credit borrowers often end up paying more for auto loans in the long run due to interest charges. However, you can save money by paying off a car loan early, and there are four main options to choose from.
Cutting Down on Interest Charges
Interest is what costs to finance what you’re buying. Those with poor credit typically qualify for higher interest rates than borrowers with good credit, which leads to higher interest charges over time.
These charges add up on a daily basis, based on the balance of your loan. The faster you pay off the loan, the less you're going to end up paying in interest charges.
You can typically pay off your loan early because most auto loans are simple interest loans. Years ago, there was a time when this wasn't the case, and lenders charged prepayment penalties to consumers that attempted to save a few bucks by making either early or multiple payments.
Luckily, that's not the case today, and loans like that are rare. This is why it's so important to read your contract carefully before you sign it. If your car loan contract contains prepayment penalties, you should think twice before signing, especially if you're getting a high-interest loan due to bad credit.
4 Ways to Pay Off Your Auto Loan Early
Paying off your auto loan early can be done in a number of ways. Typically, there are four easy solutions you can use to knock down your loan balance more quickly and save money:
- Bi-weekly payments: When you make half of your car loan payment every two weeks throughout the year, you end up making 13 full payments in 12 months. This knocks several months off your loan term without feeling like you're paying much extra.
- Split your payments: Payment splitting is very similar to making bi-weekly payments, but it's less precisely scheduled. In this method, pay half your payment a few weeks early, and pay the rest by the due date. Because you're only paying twice each month, you don't end up with the extra payment, but you still lower the interest charges that accrue between the two half-payments.
- Round up your payments: Rounding up to a whole dollar amount that's more than what you owe can add up over time and help you save money. The higher the number you round to, the better off you're going to be. For example, if your monthly payment is $315.65, you could round your payments up to $320, just to add a small boost. However, rounding up to a higher amount, such as $350 or $400 each month, would make a bigger difference in how quickly you could pay off your loan.
- Pay more when you can: If you just want to get your loan paid off more quickly, but don't have the wiggle room to be on a set schedule of extra payments, you can just pay anything extra whenever you have the chance. For example, you can knock a big chunk off your balance with your tax refund.
The good news is that all of these options are things you can do to help yourself save money, but none of them are required. The only thing you have to pay is your contracted payment amount by the due date. So, even if you begin to make extra payments to decrease your balance more quickly, and then find you can't keep it up, there's nothing holding you to it.
Additional Saving Options
If saving money on your loan sounds great but you have enough trouble coming up with your regular monthly payment, you may want to consider refinancing your auto loan. This option isn't available to everyone, but it can help you save money on your monthly payment by lowering your interest rate if you qualify.
Sometimes, when you refinance, you can only qualify to extend the loan term. This lowers the monthly payment, but it costs more in the long run due to additional interest charges, so be careful if this is the only route available to you.
Getting a More Affordable Car
If neither extra payments or refinancing are options that work for you, you might consider trading in your vehicle for a more affordable model. Finding a cheaper and/or more reliable car could help you save money, and you don't have to worry about credit standing in your way if you work with the right lenders.
At Auto Credit Express, we know how important it is to find the right vehicle, and the right auto loan. Let us help you find a local dealership that has lenders to work with bad credit.
We've been matching consumers with dealers across the country for over 20 years, and we want to help you, too. Fill out our no-obligation car loan request form, and we'll get the process started today.