How To Pay Off a Car Loan Faster: 6 Actionable Tips
JA
Summary:
Getting rid of your car payment can free up cash every month, which you can put toward other areas of your life, such as saving for a down payment, pursuing your hobbies, or treating yourself to a much-needed vacation. However, while paying off your auto loan ahead of time offers many benefits, it also has some downsides, such as potentially incurring prepayment penalties and temporarily lowering your credit score.
Purchasing a car can be an exciting milestone, but the burden of paying off a car loan can sometimes feel overwhelming. According to data from Experian, American drivers owed $1.41 trillion on cars, motorcycles, and other personal vehicles as of 2022, with an average loan balance of $22,612.
If you’re itching to pay off your debt faster and regain financial freedom, follow these six actionable tips to save money on interest and accelerate your car loan repayment timeline.
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Actionable ways to pay off auto loans faster
As long as your lender doesn’t charge a prepayment penalty, paying off your car loan ahead of schedule is a great way to save money on interest payments. Here are six actionable tips you can use to pay off your car loan faster and own your vehicle outright sooner:
1. Refinance your auto loan
Refinancing a car means replacing your current auto loan with a new one. If your current auto loan is a high-interest loan with multiple monthly fees, consider refinancing it to get better terms and a lower monthly payment amount — especially if your credit score has improved since you first applied for the loan. Be sure to compare multiple auto refinance loans on the market to find the best possible rates.
2. Make biweekly payments
Instead of making standard monthly payments, consider switching to biweekly payments to save on interest and accelerate your loan payoff. The idea behind this strategy is that paying half of a loan payment every two weeks (instead of waiting a whole month to make a full payment) can add up to significant savings over the life of your loan, primarily because less interest will accrue during the shorter two-week time frame.
3. Reduce extra expenses
One of the simplest ways to pay off your car loan early is by cutting back on unnecessary expenses. This means dining out less frequently, canceling unused subscriptions, and spending less on discretionary expenses, to give a few examples. By reallocating the money you save toward your monthly loan payments, you can pay off your car loan faster without needing to refinance the loan or take on extra shifts at work.
4. Earn additional income
Another straightforward way to accelerate your auto loan repayment is by earning additional income to put toward your monthly payments. Of course, this option is only available if you have time to take on a second job or start a side hustle, but if you’re open to creative ways to bring in extra cash, consider the following side gigs:
- Drive for Uber or Lyft
- Rent out a spare room on Airbnb
- Sell your unused items on eBay or other online marketplaces
- House-sit or pet-sit
- Start a freelance business
And if you don’t have the time or energy to take on a side job, you can always try asking your employer for a promotion or a pay raise!
5. Sign up for automatic payments
If you’re always forgetting to make monthly payments on your auto loan, sign up for automatic payments to make sure you’ll never miss a payment or be tempted to spend that money elsewhere. Late payment penalties can add up quickly, delaying your debt repayment timeline. By signing up for automatic payments, you can speed up your loan payoff and avoid incurring penalties that could add to your loan balance.
6. Opt out of unnecessary add-ons
Unnecessary add-ons could be slowing down your loan repayment. Here are some examples of add-ons you might find on your original loan contract:
- Guaranteed asset protection (GAP) waivers
- Extended warranties
- Service contracts
- Tire and wheel warranties
If you don’t need these add-ons, contact your lender to see what steps you can take to remove them from your loan and reduce your remaining balance.
Is it worth paying off your car loan early?
Whether paying off your car loan early is a good idea depends on your unique circumstances. You’ll want to consider factors like payoff penalties, cost savings, and the impact on your credit to determine whether an early loan payoff is the right financial move for you.
Check your current balance and payoff penalties
A prepayment penalty essentially punishes you for paying off your loan early by helping lenders make up for the interest payments they would have received if you didn’t pay your loan off ahead of schedule. Before making extra payments toward your loan, review the terms of your loan agreement or contact your lender to find out if there’s a prepayment penalty. If there is, ensure it’s not more than what you would otherwise pay in interest over the life of your loan.
Figure out how much you’ll save
How much you can save by paying off a car loan early depends on the loan’s APR and the length of time remaining on your debt. Before you start making higher monthly payments to pay off your auto loan early, make sure you know exactly how much you’ll save by doing so. If you’re unsure, use an auto loan calculator to help you estimate the amount of interest you’ll pay over the life of the loan.
Consider how paying off your car loan early will hurt your credit
Surprisingly, paying off car loans early can have a negative impact on credit scores. This is because credit bureaus consider the length of your credit history and the mix of credit types you use when calculating your score. If you pay off your auto loan balance before the scheduled term, it effectively reduces the length of your credit history and the diversity of your credit portfolio, which in turn will slightly lower your credit score.
Don’t worry, though; the impact is typically minimal and temporary, especially if you have a strong credit history consisting of other loans and credit accounts. However, if you’re looking to apply for a mortgage or some other line of credit soon, you may want to consider holding off on paying off your car loan early to keep your credit score as high as possible.
When you should — and should not — pay off your car loan early
According to James Allen, Certified Financial Planner (CFP) and founder of Billpin.com, “You should consider paying off your car loan early when you have a high interest rate on your loan. It’s like carrying a bag full of rocks uphill: the higher the interest, the heavier the bag. By paying off the loan early, you lighten your load sooner. It’s also a good move if you’re planning to apply for a mortgage or another significant loan. Paying off your car loan can improve your debt-to-income ratio, making you more attractive to lenders.”
On the other hand, Allen suggests not paying off your car loan early if you have other higher-interest debts: “It’s like being in a sinking boat with multiple holes: you should plug the biggest hole first. In this case, the ‘biggest hole’ would be the debt with the highest interest rate. Also, if paying off your car loan early would deplete your emergency savings, it’s better to hold off. It’s like having a spare tire in your car: you hope you never need it, but if you do, you’ll be glad it’s there.”
As mentioned earlier, you should also reconsider paying off your loan early if your lender charges a prepayment penalty.
Pro Tip
Some lenders charge precomputed interest, which means even if you pay off your car loan early, you could still be responsible for the full interest on the loan. Double-check with your lender to see if this is the case before paying your loan off early.
FAQ
What is the fastest way to pay off a car loan?
Some of the fastest ways to pay off a car loan include refinancing your auto loan, making biweekly payments, reducing your extra expenses, applying your additional income toward the loan balance, signing up for auto payments, and opting out of unnecessary add-ons. Since everyone’s circumstances are different, the fastest way to pay off a car loan can vary from person to person. Give each method a try to see which suits your lifestyle and financial situation the best.
What happens if I pay an extra $100 a month on my car loan?
By putting just $100 more toward your loan every month, you can significantly reduce the time it will take to pay off the balance and free yourself of that debt. However, you should make sure to check with your lender to see if they charge prepayment penalties before supercharging your debt repayment. Prepayment penalties are a way for lenders to compensate for lost interest payments, and they generally amount to around 2% of your outstanding balance.
Can you pay off a 72-month car loan early?
Yes, if you have the financial means to do so, you can pay off a 72-month car loan early. Not only will you potentially save a lot of money on interest, but you will also have the peace of mind that comes with not having to make car payments for the full six years. Overall, paying off your car loan early can be a smart move — provided you won’t incur any prepayment penalties.
Is it worth it to pay off your car loan early?
That depends on your individual circumstances. While it may seem appealing to be debt-free sooner rather than later, there are certain factors to consider first. For one, some lenders charge prepayment penalties for early loan repayments. Also, if your car loan has a low interest rate, it may be better to put that extra money toward higher-interest debt, such as credit card debt. On the other hand, paying off a car loan early can save you money in interest payments and free up more money in your monthly budget.
Ultimately, the decision to pay off a car loan early comes down to your financial situation and personal goals. Be sure to take some time to evaluate your options so you can make a decision that works best for you!
How much will my credit score go up if I pay off my car?
Unfortunately, when you pay off a car loan, your credit score will temporarily take a mild hit instead of going up. That’s because paying off your loan can eliminate an established account from your credit report, which could hurt the “credit mix” and “length of credit history” portions of your credit score. That said, you don’t need to worry too much about this temporary credit score drop, as it should recover as you continue to make on-time payments on your other accounts.
Key Takeaways
- Some of the best ways to pay off your car loan faster include refinancing your auto loan, making biweekly payments, reducing your extra expenses, applying additional income toward the loan balance, signing up for automatic payments, and opting out of unnecessary add-ons.
- Before paying off your car loan early, consider any potential payoff penalties, possible cost savings, and the impact it will have on your credit score.
- You can determine how much you will save by paying off a loan early by using an auto loan calculator.
- Be aware that paying off a car loan early could briefly lower your credit score due to changes to your credit mix and length of credit history. However, these changes are usually temporary, so long as you continue to make on-time payments on your other credit accounts.
- Always check the loan agreement before paying off a loan early, as some lenders charge prepayment penalties to offset the loss of interest payments.
With interest rates and car prices on the rise, paying off your car loan (without prepayment penalties) could save you a huge chunk of change in the long run. By using one or more of the six strategies listed above, you could speed up your payoff timeline and free up space in your monthly budget. Thinking about refinancing your auto loan? Use SuperMoney’s comparison tool to compare auto refinance rates and find the best deal for your needs!
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