7 Hacks to Pay Off your Car Loan Faster

by | Dec 6, 2019

Buying a car can be exciting, but parking that shiny new vehicle in the driveway often comes with something less fun: an auto loan. Most Americans who purchase a new car, and many who buy used vehicles too, do so with the help of financing. 

As cars get more and more expensive, the amount of debt Americans take on to purchase their new set of wheels has been growing. And loan terms have been expanding, too – with the standard repayment period jumping through the decades from three years to four to five and now six, with seven-year loans also available.

This is great for lenders and car manufacturers, but it’s less great for car buyers. The longer you take to pay back your auto loan, the more you’ll end up paying in the end in additional interest. Want to get out from under debt faster? Just follow these 7 simple tips:


How to Pay Off a Car Loan Faster


1. Split your monthly payment into two smaller ones

This hack feels a bit magical, because it’s basically painless — once you set up your payments this way, you likely won’t notice the difference in your monthly budget. And yet this strategy can help you pay off your loan faster and nab you savings on the interest, too.

Say your car loan is $400 per month and due on the 5th of each month. Rather than making one payment of $400 just before that deadline, instead, split your monthly repayment obligation into two smaller payments. You could make one payment of $200 on the 15th of the month and another $200 payment on the 30th, for instance. 

In effect, this means you’ll be paying part of your monthly bill early every month. This reduces the loan principal slightly ahead of schedule, meaning you’ll accrue less interest than you would if you always paid your full monthly payment right before the deadline. 

The beauty of this approach is that you won’t notice any difference in your monthly budget. Since monthly bills are what dominate most Americans’ financial lives, this strategy feels relatively painless for most people. 

Just make sure your lender does not penalize for early repayment.


2. Make extra principal payments

The most effective method for reducing the length of your auto loan is to pay more than the minimum monthly payments (again, this assumes your lender allows this with no prepayment penalty). 

If you can afford to overpay even a small amount each month, you should. To get the most bang for your additional bucks, call your lender and ask how to make sure the extra money goes toward the loan principal. 

Because interest accrues based on the remaining principal you owe on the loan, reducing the principal balance as quickly as possible will reduce the accumulating interest. This is a more efficient use of funds than paying the next month’s installment early, which would include both principal and interest.

Lenders that allow early repayment will have a standard formula they follow for payments above the monthly minimum amount. Some will automatically apply any extra payment to the principal, while others will apply a credit toward next month’s bill. In the latter case, however, the lender may instead apply the extra payment to the principal if you include specific instructions with the payment. 

Again, the latter approach is more to your benefit, so talk to your lender and make sure you’re knocking down that principal as quickly as possible!


3. Plan to take advantage of unexpected income

If your regular budget doesn’t allow for payments beyond the monthly minimums, that’s okay. You can still pay off your auto loan ahead of schedule. 

We all have moments when a little extra cash comes our way. Rather than making additional regular payments to your car loan, plan instead to apply some portion of any “windfalls” you might receive over the course of the loan to getting out of debt faster, through special lump sum payments toward your debt. 

A windfall is any type of extra income you weren’t expecting, beyond what you need to cover your basic needs. We’re talking birthday money from Grandma, an income tax refund, a bonus from work, additional income from a sweet gig, or even a generous tip from a customer. And lottery winnings if you hit the jackpot, of course. 

If you’re on a tight budget, it can be easy to let unexpected income pad your bank balance temporarily, then evaporate slowly. But if you plan ahead for what to do when good fortune comes your way, you can direct some portion of that cash toward meeting your long-term financial goals before it vanishes without a trace. 

The key is to decide on a rule now that you can remember and follow when these moments arise. Perhaps 50 percent of any windfalls will go toward your auto debt, with the other 50 percent remaining discretionary. 

Make sure to combine this tip with the one above – all additional payments above your required monthly minimum should go to the loan principal for maximum impact!


4. Round up

One of the easiest ways to pay off your car loan early is to simply round up each month’s installment loan payment slightly. Obviously, the higher you round up the greater an impact this will make, but every bit counts. 

If your minimum payment is $324.03, maybe you’re comfortable rounding up to the nearest $50, and instead pay $350 each month. Even rounding up to the nearest $10 is helpful, though, since it will save you on accruing interest.

If you make electronic payments automatically through your checking account or directly through the lender and come up with a reasonable figure you can handle each month, it’s likely you won’t even remember you’re paying extra. 


5. Refinance your loan

If something significant changes in your financial life – for example, if you’re able to improve your credit substantially – you should look into possible refinancing options with a bank or credit union. 

Paying off other debts, reducing your debt-to-income ratio, working to purge any errors from your credit report, and simply letting time pass after any collections or other knocks on your credit can all contribute to an improved credit score. And this may facilitate refinancing your car loan at a more favorable interest rate. 


6. Make an annual bonus lump sum payment

Make a bonus payment on your car loan an annual ritual. Start the year off right with a New Year’s resolution you can actually keep! 

After all, scraping together a little extra cash once a year is probably still easier than shedding extra pounds or or showing up regularly at the gym week after week. 

If you can, shoot for one whole additional car payment each year. 


7. Make sure you’re not paying more than you have to

Check your loan documents for fine print about any extras, like warranties and service contracts you don’t actually need. Canceling them will reduce your monthly payments. (Hint: Checking the fine print is also a great way to save on car rentals.)

Often, extended warranties aren’t worth the cost and you’d be better off just paying for service needs out of pocket as they come up – and making sure you have affordable car insurance

You should also set up automatic electronic payments on your car loan so you never have to worry about missing a payment and getting stuck with late payment fees — not to mention potential bad marks on your credit history. Those could make future loans more expensive, which isn’t what we’re going for here.

Not sure how much you should be spending on your car? Check out this 3-point rule for a quick estimate.


The Bottom Line

To protect your wallet, you generally want to keep debt to an absolute minimum. Use the hacks above to help you pay off your car loan faster and you’ll be calling up your lender for the final payoff amount in no time! (Or at least a few months ahead of schedule.)

The faster you pay off your auto loan, the more quickly you’ll have that money available each month to put into your savings account so you can meet your next financial goal – whether that’s paying off your student loans, getting free of credit card debt, or saving up for a new car.

Even if your budget is fairly tight, don’t be discouraged! If you manage to make even modest additional payments and slightly shorten your loan term using the above hacks, it will often represent significant savings on interest. 

Do what you can and you’ll watch your efforts add up, step by step, to greater financial freedom.

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