With the current market analysis where car loans are accessible more easily than ever before, it’s shocking to know a loan can be extended to a time limit of 96 months! This loan, if not paid off early, will include the interest and total cost of the vehicle up to the final date of that eighth-year limit.
However, a prolonged loan will pile up with an extreme amount of interest. So the sooner it’s paid, the sooner you can take full ownership of that expensive purchase.
While outrightly buying something like a 2021 Subaru Crosstrek, which starts at around $22,245, makes sense, purchasing a 2021 Chevrolet Tahoe, whose top trim retails at approximately $70,000, usually warrants a loan.
A short-term loan, or a long term, is up to your comfort level and how you manage your finances. However, in case you are unsure how to manage an auto loan, CarIndigo has you covered.
Here is a detailed step-by-step guide on how you can manage your auto loan efficiently by minimizing financial and mental burdens.
12 Easy Steps To Pay Off Your Auto Loan Early:
- Know your loan details with payoff penalties (If there are any).
- Think about refinancing the current car loan.
- Learn all the techniques to pay down the principal.
- Look for supplementary finances.
1. Know Your Loan Details With Payoff Penalties
Having a clear knowledge of your current loan helps you understand the know-how of paying it off faster. Lenders usually make it challenging for the borrowers to pay off the car loan before the schedule because it will affect how much money they make from the interest.
Figuratively, the loan is applied using simple interest, which means the monthly interest payment of a loan depends upon the loan’s outstanding balance. So, the sooner it is paid off, the fewer interest payments will be made.
2. Payoff Penalty
If a lender has the availability of an early access payoff, there are chances of payoff penalties. So before you sign any loan agreement, ask if there are any early payoff penalties. Some lenders require a fee for early payback, which can eventually reduce the interest savings, but could have been gained by paying the loan early.
We’d also suggest you check that any extra payment matches the principal of the loan’s guidelines. Some financial institutions automatically apply supplementary charges on the interest or hidden/other charges instead of reducing the principal amount. To specify the transaction or confirm it’s a “principal-only payment,” know what the lender requires to make this happen.
3. Evaluate Savings Amount
First, determine the total you owe and whether the lender is eligible for posing early payment penalties. An auto loan calculator can calculate the saving interest payments in an early payoff scenario. The early payment penalties can nullify any kind of savings.
Though the early payoffs might not give you enough savings, definitely not enough according to what you’re looking for, there are always better and alternative benefits that make it worth it. A fine example of that is an early payoff that can enhance your credit score and free additional finances in the monthly budget.
4. Think About Refinancing Your Current Car Loan
In a scenario where your car loan has a high-interest rate or additional periodic fees, refinancing the loan can provide better terms and considerably lower expenses to spend if the borrower’s credit score has increased. The application for the loan comes to act if the monthly payments are on time and paid full.
Though there are many refinancing options, always aim to pay off the loan as soon as possible. As refinancing with a 72-month (6-years) loan is still considered a long time period for keeping the loan intact, look for shorter terms and lower interest rates.
Lower interest rates, if available, can easily be achieved by overpaying towards principle each month to pay off the loan as soon as possible.
5. Learn All The Techniques To Pay Down The Principal
When one has a simple-interest loan, it can be paid off faster by overpaying the principal amount’s monthly payments. Paying off the principal faster results in paying less interest and reducing the loan’s overall cost.
Here’s the procedure that can help pay off a car loan faster by making additional payments regarding the principal amount:
6. Making Payments Semi-monthly
Considering there are 52 weeks in a year, changing the constancy where there are twice the payments to be made in a month will result in an extra payment every year.
By dividing the monthly car loan payment in half, you can pay off the amount every two weeks. The payment will come to 50% of its total, which has been paid now 26 times a year, which would have been made in 13 months and instead covers a month more than a year (12-months).
Following this procedure will also reduce the interest amount over the duration of the loan since the balance has now been paid at a much faster rate.
7. Rounding Up The Car Loan Payments
A smart way to increase the payment schedule is by rounding off payments, usually nearer to $50. To give you an example, if you’re borrowing $13,000 at a 5% interest rate for 72 months, your monthly payment will come out to be $209. Comparatively, on a regular schedule, you’ll be paying only $2,074 interest all through the loan.
Rounding up this payment to $250, you can pay the loan 13 months earlier and save a minimum of $395 in interest paid to the lender!
8. How To Find Extra Money
Here’s another way that can help you pay your car loan even faster. Just fork in some extra cash and keep paying down your car loan as you go about it.
So how do we do that? Let’s check some ideas:
9. How To Snowball Debt Payments
This is one of the best approaches to pay off debt – including vehicle loans.
Try to chunk out your debt by paying small amounts time-to-time. Don’t leave off any debt; keep paying extra each month. Continue with paying off your debts by focusing on paying extra on one debt at a time.
Don’t pay extra on all of them, just the one you want to pay off first.
Snowballing payments make your debt payoff effective and quick. Stay disciplined towards this approach, and don’t take up many new debts when you’re focusing on paying them off.
10. Make Optimum Use Of Bonuses, Tax Refunds, and Pay Raises
You can pay off your car loans much easier if you put your bonuses, tax refunds, and pay raises only towards paying off the loans. It might feel a bit painful at first, but you will get out of debt much faster. Paying down debt isn’t fun but the reward of being debt-free is worth delaying a few vacations.
Another effective method of paying off your car loans is to start paying in short-terms. Over time, you will be able to balance off your car loan more quickly, and you will be surprised how quickly you were able to pay it off.
11. Earn Some Additional Income
If you have an issue with paying off your car loan, earn extra income by doing unconventional jobs. Rent a room, clean out your closest, and sell some items you don’t use anymore.
Do some yard work or extra part-time work for your friends or neighbors for a fee. Invest your additional earnings by chipping away at your car loan as soon as possible.
12. Stop Spending Money On Stuff You Don’t Need
Don’t spend money on stuff you don’t need when you have a loan to pay off. Cut down on budget items and free up cash that can pay off your debt. Try decreasing your mobile data plan or reduce some of your regular outings. Forgo buying new clothes for a year.
Yes, these are petty things, but they will help you pay off your debts quickly.
Paying Off A Car Loan And Your Credit
Did you know you can pay your car loan off without hurting your credit?
How Paying Off The Car Loan Can Help You
The debt-to-income ratio (DTI) can help you quite a lot. DTI can judge your ability to pay off loans or even acquire new loans. A complete installment loan on your credit history would be in your favor when you are applying for another loan or a home mortgage.
How Paying Off The Car Loan Hurts Your Credit
If you don’t have another type of open installment loan, paying off your car loan can hurt your credit score. What lenders do is open credit accounts that help the credit score more than the closed credit accounts.
Without any installment loan, a student loan, or a mortgage, your credit score will decline. If your credit score lessens a bit because you paid off a big chunk of your car loan, it will be worth it rather than paying extra on a high-interest loan.
Don’t be shocked if your credit score drops when you pay off your debt. However, this drop in your credit score is worth it if your finances are finally under control.