An outstanding car loan affects both your financial situation and the value of your car by increasing the amount of your total debt and reducing the amount of your car’s equity you own. You should do what you can to pay off your car loan early to reap the benefits of owning your car without unpaid debt.
1) Do Not Skip Payments
Many lenders give customers the opportunity to skip one or two payments a year without missed car payment fees or the risk of the loan defaulting. This benefits the borrower by creating breathing-room during the holidays or in the event of a financial hardship, while giving the lender a chance to collect an extra month of interest every year over the life of the loan. Resist the temptation to skip payments when the option is made available to you. You will accrue an extra month of interest and delay your repayment schedule by at least a month.
2) Payment Amount Round Up
An easy way to pay off your car loan early is to round up your monthly payments. For example, if your required monthly car payment is $290, you can round up and pay $300 every time. This small increase will shorten the length of your loan without conflicting with most lender’s prepayment penalty policies. A slight increase in your monthly car loan expense can save you a large amount of money in interest saved over time.
3) Extra Payment
A salary bonus, inheritance, lottery windfall, tax refund, or other sudden influx of cash could be responsibly used, in part or entirely, toward an extra car loan payment. A luxury purchase might seem nice, but one extra payment alone shortens your car loan term by a month. That means you will save one month of interest and be debt-free quicker.
4) Biweekly Payments
Another way to finish paying off your car loan early is to make biweekly payments. Check the terms of your loan and your lender’s general policies to ensure biweekly payments won’t instigate prepayment penalties, which are counterproductive to fast loan repayment. Steady biweekly car loan payments will cut the length of the loan, and the amount of interest you’ll pay, in half.
5) Refinance Your Loan
Refinancing can help you pay off your car loan early if your financial circumstances, especially your credit rating, have improved since the loan was approved. Interest rates are usually calculated based on your credit worthiness, so a higher credit score and other applicant requirements could mean your refinanced loan will have a lower interest rate. A low interest rate means you can pay off more of the principal with each payment, instead of spreading those payments across more interest.
You should do what you can within your means to repay your car loan as quickly as possible. By increasing your monthly payments, and making extra payments whenever able, you shorten the length of your car loan and reduce the amount of interest paid across the life of the loan.
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