Your Money Might Be Better Used Elsewhere
Paying off your car loan early frees up a good chunk of extra cash to keep in your pocket. But its important to also look at how much youre paying monthly for other debts that might be costing you more. Which one has the highest interest rate? If your car loans rate is low compared to other types of debt, like credit cards, consider paying off the debt with the highest interest rate first. That way you save more on total interest owed.
Determine Your Current Balance And Payoff Penalties
The first step when planning on how to pay off your car loan faster is to look at the details of your loan. Some lenders make it difficult to pay off car loans early because theyll receive less payment in interest. In the best-case scenario, your loan was calculated using simple interest, which means your interest payment is based on your loans outstanding balance. If you pay off the loan early, youll make fewer interest payments.
If your lender does allow early payoff, ask whether theres a prepayment penalty. Some lenders will impose a fee for early payoff, which could reduce any interest savings youd gain by paying the loan early.
Then, check your balance and make sure that any extra payments go toward the principal of the loan. Some financial institutions will automatically apply additional payments toward interest or other fees rather than toward reducing the principal. You may have to specify that a transfer or a check is a principal-only payment, so run it with your lender first.
Calculate how much youll save
After youve figured out how much you owe and whether your lender imposes prepayment penalties, use an auto loan calculator to determine how much youll save if you pay off the car loan early. If there are prepayment penalties, they can negate any savings.
Option : For Your Next Car Purchase Buy Used To Lower Your Monthly Payment By $136
Most of us have heard that the moment you drive your shiny new car off the lot, it loses 10 to 20% of its value. Nothing much has changed except that now youre the owner of a used car. While the rapid depreciation in new car values is annoying to new car owners, it is good news for used car shoppers. Cars are now more reliable and last longer than ever before. All of this means that used cars are better options for many of us than theyve ever been. And heres the best part. The average monthly payment on a used car is about $400, while the average monthly payment on a new car is roughly $536. That $136 difference can help a lot.
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Don’t Miss Any Payments
Some lenders give you the chance to skip on payments for up to two times a year. However, taking this option is a pretty bad idea.
Along the same lines, try to be as timely as possible when making your payments. One of the main factors that are taken into consideration when calculating your credit score is how early you pay back the loan each month.
A lower credit score means you will get terrible interest rates in the future when you need to take more loans.
Additionally, the more payments you skip, the longer it will take you to pay. The implication of this is that you will pay even more interest than if you were to pay the minimum rate every month.
Split Your Monthly Payments Into Two
Going through this whole list, theres only one true rule you should follow. Your aim is to cut down the repayment from sixty months to as little as thirty. The only problem, then is how to achieve this goal.
The first way is to pay half your monthly payments every two weeks. However, this is a compromise youre going to have to discuss with your lender, since some of them arent in favor of any extra payments.
If youre able to do so, however, youll end up making 13 full payments every year, instead of 12.
This may seem like merely a dent to the loan, especially if you took a larger sum, but even such a small effort could potentially save you a lot of money in the long run.
For example, if you have a 60-month, $10,000 loan, youll save about $35 in interest, total. However, the point of this is to cut down the repayment by a month every year you have to pay.
In this case, instead of paying back in 60 months, you should be done is 54.
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Using A Car With Negative Equity As Trade
You can fill in the rest of that ad with the name of just about any car and just about any dealership in the U.S. and the promise will be as empty as your bank account because it promises negative equity.
The ad plays on every station in every market in America and you have to admit its enticing enough to make you stop and think about doing it. Someone else bails you out of a bad loan situation and puts you into a new car with no out-of-pocket expense. Whats not to like about that?
Heres a word of advice from car-buying experts: DONT EVEN CONSIDER IT!
Trading in a car with negative equity to take on another car loan with even more negative equity is like throwing gas on a fire because its the only liquid you had handy. You just increased the chances for a serious financial meltdown and here is an example of why.
Lets say you owe still owe $10,000 on a car that is only worth $5,000. The dealer will pay off the $5,000 difference, but then roll that amount into the loan on your next car. So, if you needed to borrow $20,000 for the new car, the dealer rolls another $5,000 into the loan to cover the cost of paying off your previous loan and now youre borrowing $25,000.
Not only will your monthly payments be higher , but you likely will be paying higher interest on the loan.
And, dont forget, youre going to add more negative equity to your situation when you calculate the 20% depreciation in value the new car will lose when you drive it off the lot.
Make One Extra Payment Each Year
If the thought of bi-weekly payments seems daunting but you like the idea of making an additional payment each year, you can accomplish the same goal by committing to just one extra payment a year. This way, you’ll only feel the squeeze once a year and you’ll still shorten the life of your loan by several months, or even years. Use a work bonus, tax refund, or another windfall to make that once-a-year payment.
Another easy way to make that extra payment is to spread it out throughout the year. Divide your monthly payment by 12 and then add that cost to your monthly payments all year long. You’ll be making a full extra payment over the course of the year while hardly feeling the pinch.
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Ways To Pay Off Your Car Faster
Car loans are some of the most common personal debts owed by modern drivers. Paying off your car loan early can put you on the path to financial independence by reducing the amount of loan interest you pay over time. Are you wondering how long to pay off car loans so that you dont end up upside down on your loan?
When it comes to how long it takes to pay off a car loan, the most common loan term is currently 72 months, followed by 84-month terms. So if youre one of the 70% of car owners with a term of 60 months or longer, youre far from alone. The good news is, paying off a car faster than its stated term is entirely possible when paired with the right motivation, mindset, and money management skills.
Reduce Your Term Length
A loan term is the amount of time a borrower is allowed to pay back the funds provided to them from the bank. Terms are typically measured in months and can range anywhere from 24 to 84 months in length. The longer the term length, the smaller the monthly payments will be.
However, smaller monthly loan payments do not equate with paying off your auto loan faster. Taking as long as seven years to pay off in full, car loans can last for a significant portion of your primary working career. Choose to reduce your term length to a number that best reflects your personal financial goals, taking care to calculate your monthly payments using a financial calculator.
As an additional bonus, shorter-term lengths often are associated with lower interest rates. In the end, shorter-term lengths are an excellent way to reduce total payments and conserve your financial resources.
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Can You Pay Off A Car Loan Early
First, lets start by taking a look at your car loan.
While youre probably already making payments toward your car, its important to know that a car payment is considered too high if it makes up more than 30% of your total income. Make sure to also factor fuel and maintenance expenses into this number, as a car payment wont be your only vehicle expense. Generally speaking, try not to let your car payment exceed 15 20% of your total income.
After reviewing your car payment, determine your loans current balance and confirm whether you can pay off your car loan early without penalties. While most loans do allow early payoffs, some might impose extra penalties, which would ultimately cost you more money in the long run. Make sure to pay extra attention to penalties if you have bad credit or a high interest rate.
Make Extra Payments To The Principal
Why it can be good. Auto loans have simple interest, which means that for every dollar you put toward the principal, you pay exponentially less interest to the lender.
Who it can be good for. Anyone who has an auto loan from a lender who doesnt penalize early payoff or payments to principal.
How to do it. Call the lender and ask how you can make extra payments to the principal only. You should do this because extra payments not to the principal means youre paying interest all youre doing is giving the bank money early. If you make payments to the principal, youre not paying as much in interest, which is very good.
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Increase Your Repayment Frequency
Generally, your car loan requires you to pay principal and interest. The good thing about this is that any extra repayments you make in the first few years of your loan can shorten the life of the loan and reduce the overall interest you pay.
If you cant pay more, though, try to pay more often. There are 12 months in a year, but there are 26 fortnights. If your loan is set up with monthly repayments and you divide these in two and make payments every fortnight, you’ll make the equivalent of 13 monthly repayments every year – that’s an extra month’s repayment. If you do this over the long-term, you could shorten the length of time you are in debt.
Be sure to check your loan with your broker though as some lenders calculate true fortnightly repayments so this does not apply to all cases. And, not all lenders will allow you to make extra repayments.
Vehicles Last Longer As Well As Auto Loans
- Cars, SUVs, Trucks last a lot longer than they used to. 100,000 miles used to be considered a pretty good indication your vehicle was nearing the end of its useful life. These days it is not uncommon for a vehicle to go 200,000 miles or more.
Better engines and transmissions, improved corrosion protection, more durable components all add up to vehicles that hold up a lot longer than their predecessors.
- Consumers are also doing a better job of keeping up on auto maintenance schedules.
With cars lasting longer, lenders are willing to make longer auto loans as well. Auto loans of five, six, even seven years are increasingly common because the lender is confident the vehicle will keep running that long.
Longer loans mean lower monthly car payments, which is important when you’re looking at $25,000 or more for even a basic new vehicle. A good used car can easily run $10,000 or more.
- FAQ: Longer loans mean a lower monthly payment and a more affordable vehicle.
Unfortunately, those affordable monthly payments cost you money over the long run. Interest charges pile up over time and with the way loan amortization works, each additional year you add means disproportionately higher interest costs over the life of the loan.
- FAQ: In fact, you may be surprised by how small the difference in monthly payments can be between a six-year and a seven-year auto loan, due to the additional interest costs over the life of the loan.
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Attack Other Debts: Avalanche Vs Snowball
Were not talking about the weather these are two popular methods used to pay off debts faster. The avalanche method prioritizes paying off high-interest debt first. The snowball method involves paying off your debts starting with the lowest amounts. You can read about more debt payoff methods here.
Why it can be good. These are methods that could help you pay off all your debts, not just your car loan.
Who it can be good for. If you have multiple loans or debts, these methods may help you organize them and pay them off.
Snowball method: how to do it. This is a three-step pattern that should allow you to snowball your money to pay off your car loan faster.
Avalanche method:how to do it. This method prioritizes debt with the highest APR. For example, if youre paying a higher interest rate on credit card debt than your car loan, you may be better off using any extra cash to pay that down first.
Consider Refinancing Your Current Car Loan
If your car loan came with a high interest rate or other monthly fees, refinancing your auto loan could provide you with better terms and a lower payment if your credit score has increased since you applied for the loan .
As you look at options for refinancing, keep in mind that your goal is to pay off the loan quickly. Refinancing with a new 72-month loan is still a relatively long time 72 months is six years, more than half a decade. Instead, youll want to look at a shorter term say 60 or fewer months and a lower interest rate, if possible. If you do refinance for a long-term loan, consider paying extra toward the principal every month to pay off the loan more quickly.
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Why Pay More Than Your Car Is Worth When You Can Pay Off Your Car Loan Early
About seven out of 10 people borrow money to buy their cars, and a car loan is one of the largestfinancial obligations you can have.
If youre one of them, you may have a loan that will take you 60 or 72 months to pay off.Thats five to six years! Thats too much interest to have to pay. So we want to help youget out from under that loan faster andsave money on interestby giving you 6 ways to pay off your car loan early.
Make Occasional Large Payments
Alternatively, if youre feeling extra motivated, you can instead opt to make occasional large payments throughout the year, rather than just one.
This is perhaps the most effective way of cutting down your loan to size. The more lump payments you can sacrifice and pay for every month, the better.
Using any windfalls like bonuses, income tax returns or gifts towards your auto loan will also help you pay the car off much quicker.
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Dont Forget About The Long
Its tempting to think about short-term fixes to financial problems. And getting through this month and the next is important. Try to choose a path that lowers your interest expense and total debt, if possible. Avoid decisions that can harm your credit history. Your long-term financial health depends on taking a longer-term view as you decide on the best way to get out of your car loan.
Make Payments Every Two Weeks
Instead of paying once a month, take your existing car payment and split it in half. Paying every two weeks means your loan balance is continually decreasing, which has the effect of paying less interest over the course of the loan.
Why it can be good. This is a way to essentially make an extra payment without forking over extra money.
Who it can be good for. By doing this, youre not paying any more than you normally would, but it has the effect of making an extra payment a year, so it may be especially good for someone on a tight budget.
How to do it. Check with the lender to be sure you wont run into any prepayment penalties. If not, make a half payment every two weeks instead of one full payment each month. You could automate your checking account to send the payment, or give permission to the lender to automatically pull the payment.
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