How to Pay Off Your Car Loan Faster
Updated: 9 Nov 2020
7 Ways to Pay off Your Car Loan Faster
Do you have your eye on a big purchase? A house or second vehicle perhaps? Big-ticket items like these may seem out of reach if you are still making payments on your current car. If you want to free up some money, you can try the following strategies to get out from under a car loan quickly so that you can make your next big purchase.
Lots of people ask us how to pay off a car loan faster. There are multiple ways to do this, which means you can pick any option or options below to find the most effective solution for your specific needs. Here are seven things to consider for anyone wondering how to pay off a car fast.
1 – Round Up Your Payments
Say you owe $364.28 each month on a car loan. Rounding up is how to pay off your car loan faster. By simply writing a check for $400, you can whittle away at the loan quickly. You will hardly notice the extra $35.72 you send in – just the cost of a couple of pizzas and a six-pack – but every 10 months, you have made nearly an extra month’s payment. This can shave a lot of time off your loan.
2 – Pay Twice a Month
Paying twice a month can help you pay off a car loan faster. Making half-payments twice a month eats away at principal slightly faster to prevent interest from piling up. If your monthly payment is $400, you can make two monthly payments of $200 instead.
Better still, make the payments every two weeks instead of twice a month. This adds two extra payments per year (26 payments every two weeks instead of 24 payments twice a month). Either way, as you chip away at the principal amount due by making payments more often, you’re reducing the power of your interest payments to save money overall.
3 – Refinance Your Original Loan
Many people keep paying out of habit without noticing their interest rate or other loan terms. Shop around, even if you only have a year or so remaining in your auto loan. A credit union, local bank, or savings and loan may have better terms. If you can find a great deal after you shop around, the actual cost of transferring the title to a new lender should be fairly low, around $100.
Some lenders offer discounts for online payments or payments done by Automated Clearing House (ACH). Combine a few of these angles, such as a local lender eager for your business, a slight drop in interest charges for using online services, and bi-weekly payments tied to your direct-deposited paycheck, and you could pay hundreds less each year on that auto loan.
This makes it well worth the time you put in and the cost of transferring the title. This is great if you have a high-interest rate, especially if your credit has improved since you got your previous loan. Before you talk to new lenders, you should know how much you currently owe, your APR, and about how much your car is currently worth. Also, confirm that you won’t face high penalties for paying off your current loan early.
4 – Use Windfalls Wisely
If making extra payments every month just isn’t in the cards, consider making a large one-time payment when you get a chance. A windfall is any extra money you get that wasn’t originally accounted for in your budget. This could be a bonus from work, a tax refund, a gift, or anything else of that nature.
Understandably, it can be hard not to treat yourself to something nice when extra money comes into your life. It’s important to think about the bigger financial picture and decide if that money could do the most good by going toward what you owe on your car. Putting your windfall toward your auto loan will almost always pay off in the long run. You’ll owe less, which means less interest, so you’re essentially investing by reducing the future value of what you owe.
5 – Find Extra Income
“Make more money” sounds insultingly obvious at first, but some people don’t realize how far a little bit of extra income can go. If you have any extra time to work as a freelancer or part-time employee, even on a temporary job, the extra income can help you eliminate car-loan debt in a hurry. Don’t be afraid to roll up your sleeves or get creative with your secondary gig. Options include mowing lawns, working as a cashier, freelance writing, babysitting, and anything else you can do to make some extra money with flexible hours.
Consider the following example:
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- Clara knows two people in her apartment complex who need their dogs walked three days a week for one hour each time. Each of the two dog owners agrees to pay Clara $45 per week.
- Since Clara can walk these two dogs at the same time, she’s only adding three total hours to her work week.
- She’s getting $45 per week from two dog owners, and she does this all 52 weeks of the year.
- $45 x 2 x 52 = $4,680
- So Clara brings home an extra $4,680 in a single year just for walking these two dogs, and all of that money helps her pay off her car fast.
6 – Think About Snowballs and Avalanches
These are two ways to think about paying off your debt. Knowing what you’re up against and how you’ll respond makes it easier to stick to your plan and pay off your debt with confidence. The snowball method means starting with the smallest debts first, while the avalanche method is all about paying off high-interest debt first. These are relevant to anyone with more debt than just the car loan.
Here’s how the snowball method works:
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- Start by looking at the total value of each loan from lowest to highest.
- Focus on the smallest loan first. Pay as much as you can against that one while making the bare minimum payments against your larger loans.
- Once your smallest loan has been completely paid off, you’ll probably feel great about it. Rank your remaining debts and use that burst of positive energy to get to work on your next smallest loan.
Compare this with the avalanche method, which is intended to minimize your interest payments:
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- Rank your loans from the highest APR to the lowest.
- Focus on the loan with the highest interest rate, because that’s where you’re losing money to interest payments instead of principal payments. Even if that’s a credit card loan instead of your car loan, just trust the process. Make minimum payments against all your other loans while funneling all the money you can into extra payments against this loan with the highest APR.
- Once your first loan is paid off, roll all of the money that was going towards those payments into your debt with the next highest APR.
The avalanche method is normally better for reducing the actual size of your payments over time. Still, though, many people choose the snowball method because it keeps them energized and motivated. The choice is a personal one, so think about how different your interest rates are and how many little victories you want to have while you keep yourself disciplined as far as saving money.
7 – Make Extra Payments Against Principal
This is somewhat similar to rounding up your monthly payments, paying twice monthly instead of once monthly, or paying every two weeks instead of twice monthly. Since the interest is a function of how much money you still owe on your car loan, every dollar toward the principal will reduce the interest you owe.
To see if this can work for you, call your lender to see if there’s any penalty for early payoff or extra payments to the principal. If your lender allows payments to the principal only, you’re ready to get rid of car debt quickly. Make extra payments as early and often as you can, knocking down the remaining amount of money you owe. As you do this, you’ll be saving yourself money on interest every time you make a payment. You’re also reducing the length of your loan along the way.
Valley Chevy Dealers
When you are ready to discuss financing, search for a new Chevrolet or test-drive the Chevy Tahoe, locate your nearest Phoenix Chevy dealer. We look forward to helping you find your way into a Chevy Volt or other fine car today.
Featured Image Safriibrahim / Shutterstock
