Paying off your car loan early can be a smart financial move that allows you to gain several benefits. You can save a large amount in interest charges, free up money in your budget by eliminating the monthly payment, and you (not the lender) will officially own the car. There are several ways to pay off a car loan faster, and many can be easy to follow through on.
GOBankingRates.com recently highlighted six different ways to pay off a car loan faster. We are going to condense that list down to five and show you how painless this process can be.
Step 1: Make Sure Your Car Loan Uses Simple Interest
There are two ways interest can be calculated and charged when it comes to auto loans. And almost all auto loans these days use simple interest instead of pre-computed interest.
With a simple interest auto loan, the interest is calculated daily on the amount you owe. So, the faster you are able to pay it off, the less in interest fees you'll end up paying. You can always pay off simple interest auto loans early without penalty, so step one is making sure your auto loan uses simple interest.
Step 2: Payment Splitting or Paying Bi-Weekly
Another great tactic is to split your monthly payment in two, paying half two weeks early and the other half on the due date during the month. This payment splitting method can help you save money on interest and pay off your loan faster.
Again, with simple interest auto loans, interest is calculated on the amount you owe. If you pay half of the payment earlier in the month, less interest will accumulate from there on out. Over time, this can significantly reduce the amount of interest that you end up paying.
If you use this idea to get on a bi-weekly payment schedule, meaning you make a half-payment every two weeks, you can pay more every year. Under a normal payment schedule, you would make 12 full payments a year. If you pay half of your payment every two weeks, you end up making 13 full payments a year. There are 52 weeks in a year, which comes out to 26 half payments, or 13 full payments.
That one full extra payment a year will help you save on interest and pay off your loan faster without making it feel like you are paying that much extra!
Step 3: Round Up Your Payments
Here's an example. Say you take out a $15,000, 60-month (5 year) car loan at a 10% interest rate. Your monthly payment would be around $319, but you instead round up and pay $350 every month. For just an extra $31 a month, you can pay off your auto loan six months earlier and save close to $500 in interest. That's a pretty substantial difference for such a relatively negligible monthly payment increase.
Just a little extra every month can make a noticeable difference in the long run. Plus, after you round up your payments for a few months, it may not even feel like you're paying extra - it will just be the new normal in your budget.
Many websites have great auto loan calculator tools that you can utilize to map out potential savings. For example, check out Bankrate.com's calculator tool. Here, you can enter the terms of your loan (or any potential one in the future) and use the amortization schedule to see how extra payments can help.
Step 4: Refinance to a Lower Interest Rate
If you had damaged credit when you took out your car loan, you probably qualified for a less than ideal interest rate. But if you have kept up with your car payments for around 18 to 36 months, it's possible that your credit score has significantly improved. If this is the case, a refinance could be in the cards.
When you refinance an auto loan, it means you are replacing your current loan with a newer one with different terms. Usually it's with a different lender, and, in many cases, you can get a lower interest rate and reduce the interest charges for the rest of the loan.
Step 5: Pay More When You Can
There are essentially no rules when it comes to ways to pay off a car loan faster. Extra payments do not have to be regular or even uniform. It's as simple as paying a little extra when you the money it to spare.
Whenever you get a windfall of cash, even little bit here and there can end up making a huge difference in the long run. Whether it be a tax refund, a work bonus, an inheritance, a gambling win, or whatever else, using an unexpected sum to pay off a chunk of your loan principal can reduce the time it takes to pay off the loan.
The Bottom Line
The bottom line is that paying off your car loan early will save you money in interest while decreasing the amount of time you are paying for the vehicle. In today's auto loan environment where average loan terms have increased - which means more interest charges - doing what you can to pay it off faster can save you a significant amount.
But if you have damaged credit and are simply looking to get approved for auto financing, Auto Credit Express can help. We connect car buyers with less than perfect credit to a dealer in their area that stands to give them their best shot at being approved for an auto loan. Complete our secure and free online application to get the process started today.