What Are The Options To Pay Off My Car Loan Early
There are a variety of options to pay off your car loan early, which can include:
- Making multiple payments per month
- Making one large extra payment per year
- Making one large payment over the course of the loan
Each persons debt-payment strategy should be tailored to their situation. Theres no one-size-fits-all solution. To learn more about your options, refer to the section above entitled How early can I pay off my auto loan?Or, you can use a car loan payoff calculator.
Considering Paying Off Your Auto Loan Early
Most auto loan lenders allow borrowers to prepay on the principal balance of their loan without a prepayment penalty. .
If you can manage to either increase your payments, or apply a lump sum toward the principal balance, you can consider doing so by using this calculator by crunching some numbers. Paying off the auto loan early or adding a prepayment amount each month, shortens the period of time that the loan is in place and also decreases the total amount of interest that you will pay on the loan in the long run. While it may be difficult to part with a larger sum up front, or adding an additional amount each month to your payment, paying off your loan early can potentially save you thousands of dollars overall.
- FAQ: An auto loan early payoff calculator like this one can help you figure out how much.
When It Makes Sense
Although everyones situation is unique, shortening your car loan repayment period makes the most sense when:
- Youre in good shape financially. Think about whether you have enough money to cover bills, day-to-day expenses, and savings contributions. If paying off your loan early wont interfere with other financial needs, then it might be right for you.
- You have extra funds. Whether you receive a work bonus, tax refund, or some other influx of cash, you could put it toward paying off your loan. After all, you probably werent planning on having this extra money, so it wont affect your budget.
If you have credit cards, personal loans, and other debt with higher interest rates than your car loan, you should probably focus on paying those off first.
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What To Know About Paying Off Your Car Loan Early
Paying off a car loan early can be harder than it sounds. Lenders may charge a prepayment penalty, which is a fee for paying off the loan ahead of time. This fee varies for each specific loan and is set by the lender. In some cases, the prepayment penalty may be the total interest remaining on the loan.
Theres no way to get rid of the prepayment penalty once the loan is in effect its part of your contract. Even if you refinance the car, youll still have to pay the prepayment penalty. This is why its important to make sure your lender doesnt charge you a prepayment penalty when you sign up for the auto loan. Youll typically see this in subprime auto loans.
Using The Auto Loan Calculator
- This calculator uses your original loan amount, length of the loan and interest rate to calculate your current monthly payments. From there, enter the number of months left on the loan, then enter how much extra you’d like to pay each month to see how much sooner you’d pay it off.
You can adjust that figure using the slide bar to experiment with how varying the additional payment would affect how early you can pay off the loan and how much interest you’d save. Your results appear instantly at in the blue field at the top of the calculator and just below it at right as you adjust the extra payment figure.
- FAQ: Arm yourself with various scenarios that fit your budget goals
Start by entering the number of months remaining on your car loan, than enter the full length of the loan, in months. If you want to see the effect of making extra payments over the entire length of the loan, just enter the full length of the loan in both places. Next, enter the amount of the loan and the interest rate. The calculator will immediately display your regular monthly payment for the loan in the place indicated. Next, enter any additional amount you’d like to pay each month. The number of months you’ll shorten your loan by and your interest savings will appear at the top of the page.
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Make One Extra Payment
If you dont have the cash flow to commit to bi-weekly payments, you can achieve the same result by making one extra payment per year. Use money from a tax refund or bonus from work to help pay down your loan faster.
Or you can divide your monthly payment by 12 and add this amount to all future payments. For example, with my car payment I can divide $264.12 by 12 months and add $22.01 to each payment.
Each payment would be increased to $286.13 equaling one extra payment per year.
What Happens When You Pay Off A Car Loan Early
If your car loan allows for an early payoff, you have the opportunity to save money on interest and improve your credit score.
Depending on your car loans interest rate, the longer the loans terms, the more interest you can rack up. So if you pay your loan off early before the term ends, you can actually save money by not having to pay as much interest. Now, instead of paying off your loans interest, you can have that money to spend on other purchases. To find out how much money you could save in interest, speak with your lender or utilize an auto loan calculator.
If you do choose to pay off the balance for your car loan, keeping the account open for the loans full term will show investors that you made your payments on time, which could potentially boost your credit score.
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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.
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.
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Shop For A Lower Car Insurance Rate
If you haven’t shopped around for cheaper car insurance in the past couple years, it’s time to review your policy and get quotes from other carriers.
If you’re happy with your current company, talk to your insurance agent about different strategies to lower your car insurance premium. Review all available discounts and evaluate the possibility of increasing your deductibles and/or lowering your coverage. Keep in mind that changing those factors will lower your premium, but if there’s an incident, you’ll be responsible for more out-of-pocket costs. Take a balanced approach.
If you’re open to change, get quotes from two or three other insurance carriers. Try your best to get quotes on the same coverage from each company so it’s easy to comparison shop.
Consider working with an independent agent to speed up the process of getting quotes and lowering your costs. Independent agents contract with multiple insurance companies.
Why Is It Important To Pay Off Car Debt Fast
According to , monthly payments for vehicles range anywhere from $550 for new cars or $393 for used cars. Monthly lease payments fall into the middle of both figures, amounting to $452 on average. These numbers are made much higher when paired with low credit scores, poor credit history, and missed payments.
With thousands of dollars paid on principal and interest every year, many vehicle owners are driven to pay down their debts and become financially independent. However, the large amounts of money associated with an auto loan and often daunting business jargon can cause many individuals to assume the worst about their financial situation.
As a significant portion of the average Americans monthly expenditure, car debts are often large obstacles on the path towards pure financial freedom. The faster car debts are paid off, the faster personal wealth can be grown and managed. Implementing an actionable plan for paying down personal car debt is an excellent method of removing excess financial burdens that affect your lifestyle goals.
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Boost Your Income And Put All Extra Money Toward The Loan
A great way to cut the life of your loan is to work on earning more money with the intention of making extra payments on your loan. Consider selling stuff on Amazon or eBay, cutting your impulse purchases and putting saved money toward your loan, or taking on a side hustle on weekends or holidays for extra cash. Even a job that nets you an extra $200 a month can make a big difference in your loan.
Triumph over your loans by using one or more of these tricks to make them shorter and pay less interest. You deserve to keep more of your money!
How To Get A Car Loan Payoff Quote
For most people, buying a car means getting a loan, which they will be obligated to make monthly payments on for several years. That doesn’t mean, though, that the borrower is going to do that. Somewhere along the line, he or she is likely going to pay off that debt before the loan term ends. There are a number of reasons for this, the most common being that the borrower is ready to get rid of the vehicle and buy a new one. Whatever the reason, paying off a car loan early will require contacting the lender and finding out just exactly how much is owed.
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Look Into Different Insurance Coverage Options
One advantage of paying off your car loan is that you may be able to get a better rate on your car insurance. First, notify your insurance company that you’ve paid off the loan so they can remove the other lien holder from your policy.
Lenders often require that you carry a minimum level of insurance so that if any damage were to occur, their collateral and investment would be sufficiently protected. Once your car is paid in full, there are no longer lien holders and you may be able to contact your insurance company to see if it can reduce your coverage or offer you a better rate.
Make A Payment Every Two Weeks
Submitting payments every two weeks on your vehicle instead of monthly can also help you pay off the loan a little earlier. By paying half of your monthly payment every two weeks, you end up making a total of 26 payments per year, which is equivalent to making 13 monthly payments in one year rather than 12. Contact your lender to make sure this is an option and for their assistance in setting it up.
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Proven Ways To Pay Off Your Car Loan Faster
Your monthly car payment doesnt have to hold you back.
Pretty much everyone these days has a car loan. If you glance around your company parking lot or notice the cars you pass on the street, chances are youre looking at vehicles that have yet to be paid off.
According to research from Experian, about 55% of used cars are financed and 85% of new vehicles have a loan on them. Experian also found that outstanding auto loan debt rose by 6.5% in 2019 compared to the first quarter of 2018.
If youre currently paying off a car loan, heres how you can do it faster and how that can save you money in surprising ways.
2021 Auto Refinance Rates
Refinance To A Lower Interest Rate
Has your improved since you purchased your car? If it has, refinancing to a lower rate is an effective way to pay off your car loan early. By lowering your interest rate, you’ll reduce the monthly paymentand if you pay more than the monthly payment, youll be well on your way to reducing your debt.
Before you refinance, you should:
- Know your interest rate
- Check for a lower rate at a credit union, bank, or online
- Finance for a lower rate and shorter term
Reducing your interest rate means you will pay less overall, but it doesn’t mean you’ll pay it off sooner if you choose a longer loan term.
For example, if you have three years left on your car loan with a 5% interest rate and refinance to a five-year loan with a 2.5% interest rate, you just extended your loan two years unless you choose to pay the loan off early. This does lower your payment and put money in your pocket to spend on other, higher-interest debt. If you extend your car loan term, consider increasing your monthly payment amount to pay it off at a faster pace.
If you have a lump sum to pay off your car loan early, check with your lender to find out if there are any prepayment penalties and what those penalties are.
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Ways To Pay Off A Loan Early
If you’re like most Americans, you owe money toward a large loan. Whether that means carrying thousands of dollars in credit card debt, having a hefty mortgage in your name or making car loan payments each month, loan debt is part of your life. This means you’re looking at hundreds of dollars in interest payments over the life of the loan. There’s also the mental load of knowing you owe perhaps tens of thousands of dollars and that you’ll be paying back the loan for years to come.
It can all get kind of depressing-but it doesn’t have to be that way.
Did you know there are simple, but brilliant, tricks you can employ to lighten the load? With a carefully applied technique, you can pay off your mortgage, auto loan, credit card debt and any other debt you’re carrying quicker than you thought possible. These tricks won’t hurt your finances in any dramatic way, but they can make a big difference to the total interest you’ll pay over the life of the loan and help you become debt-free faster.
You can free up more of your money each month, use your hard-earned cash for the things you want instead of forking it over in interest and live completely debt-free sooner than you’d dreamed. It’s all possible!
A note of caution before we explore these tricks: Check with your lender before employing any approach, as some loan types have penalties for making extra or early payments.
Round Up Your Monthly Payments
Round up your monthly payments to the nearest $50 for an effortless way to shorten your loan. For example, if your auto loan costs you $220 each month, bring that number up to $250. The difference is too small to make a tangible dent in your budget, but large enough to knock a few months off the life of your loan and save you a significant amount in interest.
For a potentially even bigger impact, consider bumping up your payments to the nearest $100.
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Save Time And Interest
Wondering how to pay off your car loan faster while saving interest? Increasing your monthly payment could be a smart way to save yourself money in the long run. The Bankrate Auto Loan Early Payoff Calculator will help you create the best strategy to shorten the term of your car loan..
Enter your information into the early loan payoff calculator below, including your additional monthly payment, and click Calculate to see your total savings. Click “view the report” to see a complete amortization payment schedule.
