Your car payment is probably one of your biggest monthly expenses. Figuring out how to pay off your car loan faster can save you a significant amount of money even if you have one of the loans best car loan rates. We at Home Media Review team give you strategies for paying off your car loan early and when it may or may not be right for your financial situation.
Should You Pay Off Your Car Loan Early?
The first step to paying off your car loan early is to find out if it’s a good idea. While getting rid of your car payment may seem like a huge benefit, it may not always be the best financial decision.
How to use a car loan calculator
Before attempting to pay off your car loan early, see if you would actually benefit from doing so. The additional savings may not be worth the adjustments you would have to make to your budget.
One of the easiest ways to find out how much you can save is by using a car loan calculator. These tools allow you to enter different scenarios such as: B. higher monthly payments and see how that would affect your loan. You can even see what your payments would be if you refinance your car loan at a different interest rate.
When to pay off your car loan early
There are many situations in which it makes sense to pay off your car loan faster than your contract allows for. Here are some of the most common:
- You got a raise or extra money: If you’ve recently received a raise, a tax refund, or otherwise unexpectedly received extra money, you may be able to afford to make larger payments.
- You want to be debt free: When you pay off your car loan, you go from debt to asset. This could increase your credit score in addition to lifting a monthly commitment.
- You have a high interest rate: You may have had to settle for a high-interest loan when buying a car. Paying off your loan early can significantly reduce the interest you pay over the life of the loan, especially if your interest rates are high.
- You want to save money: Prepaying your car loan reduces the amount you pay in interest. Depending on how quickly you pay off your loan, the savings can be significant.
- You have a variable rate car loan: With lending rates rising, it may be a good idea to pay off your car loan faster to avoid facing a higher rate.
When you may not want to pay off your car loan early
Paying off your car loan faster isn’t always the best move. Here are some situations when it might not make sense to pay off your car loan faster:
- Your car loan has prepayment penalties: Some loans come with early repayment penalties. In this case, early repayment won’t save you money,
- You really can’t afford that: It may seem wise to make additional payments on your car loan, but if you end up having to borrow money, it can hurt your financial situation.
- You have other debts with higher interest rates: In many cases, the interest rate on a car loan is lower than the interest rates on credit cards, personal loans, student loans, and other types of financing. If you have loan debt with higher interest rates, it usually makes more sense to pay off it early.
5 ways to pay off your car loan faster
If you’ve decided that early loan repayment makes sense, you have several options for doing so. Your best option depends on your personal financial situation and money habits.
#1 Refinance your car loan
Auto loan refinance gives you the opportunity to get a new interest rate and loan term. If you can afford higher payments, you may be able to secure a refinance loan with a lower interest rate and shorter term.
However, a refinance loan is just a new car loan for a vehicle you already own. It may come with the same fees and additional costs as other loans, so factor those costs into your calculations.
#2 Split your bill into two bi-weekly payments
At first glance, paying half the installments on your car loan every two weeks may seem like net neutrality. However, this results in 26 payments over the course of a year instead of 12. That means you make an extra monthly payment each year.
#3 Make a big payment
If you’re making extra money through a job bonus, tax return, or other source of extra income, a large lump sum payment on your car loan can help you pay it off faster. This is especially true if your lender credits additional payments over and above the required debt payment against the principal balance. This will also reduce the interest you will be charged in the future.
#4 Round up your car payments
Any additional amount you pay on your car loan will help you pay it off early. Simply rounding up your payment to the nearest $50 or $100 can go a long way. For example, if your car loan payment is $365 per month and you pay $400 per month, after a year you will have paid another $420 on your loan – more than one month’s payment.
#5 Check the additional car costs
You may be using your car loan to pay for things you don’t need. Traders usually roll things like gap insurance and car guarantees into purchase loans. In some cases, you can get a partial refund by ending this coverage, which will lower your monthly payment. If you continue to make the same payment that you previously made, you’ll pay off your car loan faster.
How to Pay Off Your Car Loan Faster: The Bottom Line
For many people, stopping car payments can be a game-changing financial move. When it comes to paying off your car loan faster, you have several options. Whatever you decide, first make sure you are in the right position to take advantage of the early payment of the balance on your car loan.
Should you pay off your car loan faster: checklist
To help you decide whether it makes sense to take out your car loan early, we have created a checklist. As you review most or all of the items on this list, it’s worth checking out how to pay off your car loan faster:
- Paying off your loan early can save you a lot of money.
- You can achieve other financial goals by cutting off your loan payments.
- You can afford to make bigger payments or one big payment.
- Your loan has no prepayment penalty.
- You have no other debt with higher interest rates.
- You can refinance your loan without too much additional cost.
Our recommendations for refinancing car loans
Car loan refinance can be a great way for you to pay off your car loan faster—as long as you secure affordable interest rates with a reputable lender. Sourcing quotes from providers allows you to compare them and see who is offering the best refinancing rates for you. We recommend starting your search with one of the following providers from our list of the best auto loan refinance companies.
Automatic approval: top choice for refinancing
In our review of the best car loan providers, Auto Approve was named the top choice for refinancing. As a pure refinance lender, Auto Approve offers competitive interest rates for borrowers looking to obtain new credit to pay off their auto loans faster. The company also has a very easy online application process and does not charge any prepayment penalties.
Continue reading: Auto Approve Review
MyAutoloan: Best Low Interest Rate Option
For those looking for refinance loans, myAutoloan’s marketplace model is worth checking out. Instead of letting borrowers search for lenders, the site allows borrowers to submit their information and lenders to come to them. This makes comparing offers easy and efficient.
In addition, myAutoloan is open to borrowers with a credit score as low as 575. That means people with less-than-stellar credit histories may be able to refinance auto loans, too.
Continue reading: myAutoloan Review
Because consumers rely on us to provide objective and accurate information, we have developed a comprehensive rating system to formulate our ranking of the best car loan companies. We collected data on dozens of loan originators to rank the companies based on a variety of ranking factors. The end result was an overall rating for each vendor, with the companies with the most points topping the list.
Here are the factors our reviews take into account:
- Reputation (25% of total score): Our research team considered industry expert reviews and each lender’s fiscal year to generate this score.
- Prizes (25% of total points): Auto loan providers with low APRs and high loan amounts scored highest in this category.
- Availability (25% of total score): Companies that cover a variety of circumstances are more likely to meet consumer needs.
- Customer Experience (25% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness and helpfulness of each lender’s customer service team.
*Data correct at time of publication.