7 Guaranteed Ways to Pay Off Your Car Loan Faster

There’s nothing more depressing than paying high monthly amounts on your auto loan for years on end. Use these tips to pay off your car loan faster, improve your credit, and save money in the long run!

Here are a couple of quick numbers for you – the average length of car ownership in the US is 79 months (roughly 6.5 years). However, did you know that almost 69 of those months (or 5.7 years) are spent paying car loan payments? That essentially means that Americans actually “own” the car they drive for less than a year before replacing it!

While taking on a long loan term may seem great because of the low monthly payments, you will often end up paying more than the principal in the long run! If you would rather pay off your car loan in the fastest way possible, then you’re in the right place.

In this post, we’ve listed 7 great ways in which you can save money by fast-tracking and paying off your car loan early.

Should You Pay Off Your Car Loan Early?

To decide whether you want to pay off your car loan soon, analyze the following factors and see if you can save more money in the long run.

• Remaining loan term: Generally, any loan term longer than 72 months will incur high interest charges. If you had taken a 72-month, 84-month, or 96-month loan, it makes sense to pay it off soon.

• Current remaining balance: Still have a large loan balance after 3-4 years of monthly payments? You’ll save more money by closing it as soon as possible.

• Prepayment penalties: Lenders receive interest for every month of the loan term, so they typically do not encourage early payoffs. If the prepayment penalty is negligible compared to the savings you’ll make then it’s better to pay off the loan,

• Calculate how much you can save: Use an auto loan calculator to quickly find out your gross savings. Even if it isn’t as much as you expected, closing the loan may have other knock-on effects like a bump in credit score, etc.

Also Read: How are car loan payments calculated?

Here Are The 7 Best Ways to Pay Off Your Car Loan Early

1. Refinance your auto loan for a lower term

Auto refinancing is a great way to reduce your loan term and pay off the loan easily. Refinancing your car loan involves taking on a new loan with better terms and conditions than your current loan. The new lender will pay off the existing loan balance, and you get to pay reduced payments due to a lower APR, shorter loan term, or both. Keep in mind that this only works if the new loan term is smaller than the current one.

2. Review any add-on expenses in your car loan

Paying off your current loan will take longer than usual if you have additional expenses and plans bundled into the loan amount. Some examples of these add-ons include:

• Extended Warranties
• Vehicle Service Contracts
• Guaranteed Asset Protection (GAP)
• Tire, wheel, and maintenance warranties

Depending on which ones are important, you can exclude the unnecessary items and reduce the total loan amount to be paid. Different dealers may have their own procedures for excluding these add-ons, so reach out to them if you want to economize.

3. Choose bi-weekly payments

Bi-weekly payments allow you to make one extra payment every year. This is because not every month has four weeks – some months are slightly longer. If you choose monthly payments, you will make only 12 full payments in a year. However, choosing the bi-weekly options means that you’ll pay 26 half-payments – or 13 full payments. This can help you make one additional payment in a year and close the loan earlier.

4. Ensure extra  payments go towards paying off the principal

Unless explicitly mentioned, most of the extra payments you make go towards repaying the interest charges and not the principal. However, making more payments to your principal can quickly reduce the amount of time you spend paying off the loan.

This is because auto loans use simple interest to calculate monthly payments. Repaying the principal first helps reduce the loan balance faster, thereby bringing down the time spent in repaying the loan. Ensure the extra payments are marked “principal-only” when paying.

5. Use the Snowball or Avalanche methods to prioritize

The Snowball Method of debt payments involves making extra payments to the smallest debt you owe until it is completely paid off. If you have multiple loans, you can start with repaying the smallest and work your way to the next largest debt, and so on. This is a great way to motivate yourself to pay off your pending loans.

However, if you want to save money right off the bat, you can use the Avalanche Method of debt payments. This prioritizes the loan with the highest interest, ensuring it is paid off first before moving to low-interest loans.

6. Round up your payment to the nearest $50

If you feel it’s unlikely you can make any extra payments in a year, commit to rounding off your monthly payments to the nearest $50. For example, if your payment is $207/month, round it off to $250. This is a small enough increase that it doesn’t affect your monthly finances, but will still help you cumulatively repay the loan quicker.

7. Use pay raises/bonuses/refunds to pay off your loan

Your finances are usually a test of your willpower – and it is most tested during a pay raise or bonus! If you find yourself getting windfall gains at work, put them to work by making as many extra payments on the car loan as you can. While it may hurt to not increase spending in the short run, you can get more savings in the long run by closing the auto loan sooner!

What Is the Fastest Way to Pay off a Car Loan?

The fastest way to pay off a car loan is either by auto loan refinancing or closing the loan using a lump sum payment.

Will My Car Payment Go Down If I Pay Extra?

What Happens If I Double My Car Payment?

Doubling your car payment will reduce your interest charges twice as fast, which means you can start repaying the principal sooner. This means you can reduce the loan term quicker!

Can You Pay off a Car Loan Early to Avoid Interest?

Yes, paying off a car loan early can help you avoid accumulating interest on the remaining loan balance. You can either start making larger payments on your loan, refinancing your car loan to get a better rate, or pay it off with a lump sum amount.

Frequently Asked Questions (FAQs)

Does Paying off a Car Loan Early Affect Your Credit?

Yes, repaying your car loan early can reduce the amount of debt you owe, thereby improving your credit score. It also signals to other lenders that you are capable of repaying loans on time, and they will be more amenable to lend to you in the future.

Is It Better to Pay a Car Loan Twice a Month?

Yes, choosing biweekly payments will help you make one extra payment every year, thereby repaying the car loan faster.

How to Get Out of a Bad Car Loan?

If you find yourself stuck in a loan with high APRs and high monthly payments, then you should consider the following options:

• Refinance the auto loan for a lower APR and a better term
• Renegotiate with your dealer for a temporary forbearance
• Trade in your car for a cheaper one and pay off what you can
• Sell the car to a third party and pay off the loan
• Voluntary repossession – turn in the car to the lender

What Happens When You Pay Off Your Car?

If you live in a state where an individual is a titleholder when the loan is being repaid, the lender will send you a statement of lien release. If you live in a state where the lender holds the title until repayment, they will send the title to you marked as free and clear of liens.

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