Very few people have the financial capability to purchase a car outright, which is why many people take out car loans. Outside of home mortgages, a car loan is one of the biggest financial obligations that you can have. Depending on the terms of your car loan, it could take you upwards of six years to pay it off.
There’s a good chance you’ll be looking to pay your car loan off early so that you can get rid of the burden of debt as soon as you can as well as so that you can try to cut down on the amount of interest that you would pay over the lifetime of the loan.
The following are 6 effective strategies to use to pay off your car loan early:
Standard car loans require that you make one payment a month, which equals 12 payments in total every year. Part of this payment goes towards your principal, while another part goes towards your interest.
Instead of paying once every month, consider paying twice a month. This doesn’t mean you have to pay double – instead, simply split your monthly payment in half.
By paying every two weeks instead of every month, you’ll end up making 26 total payments over the course of the year (taking into account that there are 52 weeks in the year). This equals 13 months of payments instead of 12, so in essence, you’ll be making an extra month’s payment every year by paying biweekly, all by just dividing your monthly payment in half so that you can make two payments instead of one.
This is extremely beneficial since if you keep this up, you can pay your loan off sooner, thereby saving a great deal of interest over time.
If making biweekly payments is too much of a financial stretch for you, consider saving money up so that you can make that one extra payment at the end of the year.
One way that you can do this is by taking the equivalent of one month’s payment and dividing it by 12. Take that sum and either add it to each monthly payment you make or set it aside in a separate account so that you can make an additionally month’s payment at the end of the year.
This will have the same effect as making biweekly payments by helping you pay off your loan quicker, thereby reducing the amount of interest that you’ll pay.
Monthly payments are rarely a nice round number. One way that you can pay extra in order to reduce your loan debt quicker is by simply rounding that payment up.
For example, if you’re paying $219 a month on your car loan, round it up to $250. It’s a small amount of money, but it will add up over time, to the point where you could pay your loan off months earlier than expected, potentially saving you hundreds of dollars in interest.
You can decide how much to round up – if you can only afford to round up to $225, that’s okay. If you can make $300 a month work then go for it!
Any extra money that you pay towards your loan will go towards the principal, thereby not only reducing your debt but also the interest you’ll have to pay on that debt, which will help shorten how long it will take to pay off the rest of your loan even more.
Because of this, consider putting any extra money you make towards paying down your car loan. This extra money could come in the form of a raise, a bonus, additional income, inheritance, the sale of personal possessions or even tax refunds.
Refinancing a loan is a process in which you basically take out a new loan in order to pay off the old loan. This can be beneficial if the terms of the new loan are better than that of your old loan.
Refinancing your car loan can be a great way to save a substantial amount of money on interest as well as to pay your loan off quicker. If you’ve been making payments for a year or two, then there’s a good chance that your credit score has improved. If this is the case, then you may qualify for better interest rates.
Additionally, check to see what interest rates on car loans are going for in general. If they’ve gone down substantially from when you took out your loan, it may be worth refinancing in order to lock in at the improved rate.
When refinancing your car loan, be very careful about the math. Your interest rate may become lower, but your loan duration could become longer. You may want to lock into a loan with a shorter duration that you can pay off quickly if you do this. However, your monthly payments may end up being larger as a result.
Sit down and look at the money you’re spending every month. There’s a chance that you could save money on certain expenditures that you can then put towards your car loan.
For example, instead of eating out every night, buy groceries and cook at home. Instead of going to the movies every weekend, subscribe to Netflix or some other streaming service.
Figure out how much money you are currently spending on everything from groceries to gas, then figure out how you can save money on those costs.
Determine how much you actually save once you’ve made the changes and begin putting that money towards your loan. You’ll be surprised at how much money you can save on small everyday costs that will make it much easier to pay down your car loan.
If you want to relieve yourself of your car loan debt as quickly as possible and save on the amount of interest that you would have paid over the course of your loan, then consider using some of these methods to pay your car loan off quicker.