Paying off your car loan early can give you a lot of financial advantages and isn’t too difficult to get started on. If you’re eager to get your loan paid off early we’ve prepared some tips for you to try out.
Benefits to paying off your car early
- You could be saving money on interest
- Paying off early could help prevent you from paying more interest.
- Your credit score might improve
- When you pay off debt, you’ll usually get an increase in your credit score, depending on other factors affecting your score as well.
Car loan payoff schedule
Paying more money each month is an easy way to pay off your auto loan sooner. Generally speaking – check with your lender to make sure – when you make your regular monthly payment, on or before your due date, any extra amounts you can pay in addition to your regular monthly payment will go directly to the principal balance of your loan.
When you pay down the principal of your loan in this fashion, you’ll shrink the amount you owe faster, which will in turn reduce the amount of interest you need to pay because your loan may not have to go to the full loan term you signed for in your contract.
Round up your payments
A common way to improve your equity and pay off the loan faster is to simply round up your payments every month. Rounding up your payment may not seem like a lot, but over time, that extra money adds up and you’ll notice it in your account statement.
For example, if you have a $350 payment, you might consider rounding that payment up to $400 a month. Over the course of 12 months, the extra $50 you’ve been paying turns into a total of $600, which is a whole payment and a half extra, using the $400 payment as the sample payment. You’ll get the additional benefit of saving some money on interest.
Make larger payments each month
If you follow the logic from the previous example, rather than rounding up, you could set a new larger payment you feel comfortable making, and make that payment each month. The loan will pay off faster the more you can afford to pay. For example, if your payment is $400 and you get a raise at work and realize you have some extra cash on hand, you could bump that payment up to $600 and turbocharge your payoff. An extra $200 per payment equates to $2,400 per year, if your normal payment is $400.
Make a lump sum payment
Another way to get ahead of your car loan payments is by making a lump sum payment. A lump sum payment can bring a chunk of your principal down and shorten your loan length. This could help reduce your interest burden through the life of your loan and help you pay off early.
If you get a tax refund, a holiday bonus or another type of financial windfall, you might consider putting some or all of it to your car loan to help reduce the amount you have to pay in interest.
Opt out of unnecessary add-ons
When you’re buying a car, sometimes you want to make sure maintenance and oil changes are all easy and low-cost. Fortunately, many products like this exist for you to purchase. But if you find you’re not using them, or you’ve moved away from your coverage area, it might make more sense to cancel those products.
Ancillary products can sometimes be canceled, and you might qualify for a pro-rated refund. For more information on refund eligibility, please contact the original dealer you purchased the car at to cancel any products you purchased, or the policy provider on the documentation you received.
When NOT to pay off your car loan early
Strange as it may seem, sometimes you’ll find yourself in a situation where you may not want to pay off your car loan early.
- If you have high-interest debt, like credit cards, it might be better to apply extra money or payments to your credit card debt.
When you purchase a vehicle, keep in mind that you’re investing your money into it. If it suits your financial situation, it might be a good idea to pay your car loan off early.
