As moneylenders and banks are making car loans accessible to more and more borrowers, the terms of the loan may stretch for 8-10 years – sticking borrowers with a fixed payment during all that time . For much of that time, the borrower winds up only paying off the huge amount of interest on the loan, so learning how to pay off a car loan faster can help you save money, without taking much of a toll on your rest of the budget.
One question that often comes up when talking about paying off car loans is whether getting rid of debt faster or earlier really helps. Paying off a loan early probably sounds like a great idea to many of you. However, there are several factors one needs to consider before deciding if it’s the right move for you. For instance, determining your existing balance, clearing all the penalties, and considering how paying off the loan early may affect your credit score.
Let’s get ahead by learning some tips on how to pay off a car loan quickly.
Consider Refinancing Options
If your existing loan comes with a high interest rate or monthly/annual fees, consider refinancing your car loan. Refinancing may provide you with better terms and a lower payment rate. This may be especially true if your credit score has increased since you applied for the existing loan.
While looking for suitable refinancing options, remember that your goal is to pay off the loan quickly. Refinancing with a fresh 72 months loan is a comparatively long time if you started with a 6-8 year loan. Alternatively, look for a short-term loan with a much lower interest rate. If you choose to go with long-term loan refinancing, make sure you are able to pay extra towards the principal amount every month.
Try Making Bi-Weekly Payments
If you alter the frequency of your fixed payments to every second week instead of paying every month, you will make one extra payment every year. Here is a quick brief explanation of how it works: A year has 52 weeks, which means not every month has four weeks. Some months have five weeks . That is why people who get paid every other week generally receive three paychecks in the months of April and September. If you make bi-weekly payments on your loan , the interest payments over the course of the loan will also reduce, decreasing the remaining principal faster.
Start Rounding Up Monthly Payments
Another great tip to learn how to pay a loan off faster is to begin rounding up your monthly payments. This is quite simple! For example, if you borrowed $15,000 at an interest rate of 5% for 72 months, your monthly payment would be $241.57. Following that payment schedule, you will pay a total of $2,393.33 in interest. You will save a lot of money if you simply round up your payment to $250.
Avoid Paying for Add-Ons.
You might be slowing down your loan repayment by paying fees for extra items included in the original contract. You may have to read the fine print to recognize the add-ons like service contracts, guaranteed asset protection (GAP) waivers, tire/wheel warranties, and extended warranties. To take this step to get rid of debt fast, you should always reach out to your money lender or bank partner.
Putting Down Extra Money
Putting tax refunds, bonuses, and pay raises toward your car loan may seem painful now — but in the long run, paying off your car loan faster will free up your budget for more enjoyable expenditures, like vacations or dining out.
Applying pay raises to car loan payments is an especially effective method of paying down a car loan. Instead of increasing your spending, arrange to put the extra income toward your loan until the debt is paid off. Pay raises may not result in a large increase per paycheck, but over time it’ll help bring down your car loan balance much sooner .
Have any questions? Feel free to share them in the comments section below.