Avoid Owing More Than Your Car Is Worth
If you have a long-term loan, theres a chance that youll owe more on your car than its worth at some point in your loan term thanks to the cars depreciation rate. When this happens, you have negative equity in your car also referred to as being upside down on your car loan. Paying off your car loan early could help reduce that risk.
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.
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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Tip #: Refinance Your Loan
Depending on when and where you applied for your car loan, you may not have received the best deal. Car dealerships are notorious for having higher interest rates on their loans, and if you didnt shop around beforehand, you may have thought it was a good deal at the time. But over time, you may notice that you’re paying a lot more than you want to and that it will continue until the loan is paid off.
Just because you took out a loan with one financial institution doesnt mean you have to continue to pay your car back through that lender. Refinancing your loan is a great way to help pay your car loan off faster, and its generally easy to do. When you refinance, you can receive a lower interest rate, which will allow you to pay more on the principal and save you hundreds of dollars in interest in the long-term.Rivermarkhas auto loan rates as low as2.49%APR when you refinance your auto loan. Take advantage of refinancing so that you can pay your car loan off even faster.
When Paying Off A Car Loan Early Makes Sense
- If you dont have more urgent debts with higher interest rates, paying off your car loan early can really free up your monthly budget.
- Make sure you have emergency savings already. This should be a priority before paying off your car loan.
- If you expect bigger expenses down the road, such as children, paying off a car loan early can make room in your budget.
- If your credit score is weighed down by your debt-to-income ratio, paying off your car loan can dramatically improve your score.
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Have Questions About How To Pay Off A Car Loan Early
If youre still unsure about the steps you need to take or if its good for you specifically to pay off a car loan early, get in touch with our financiers. If you have any other questions about car shopping, be sure to explore our car buying tips for more informative reads about how to refinance a car loan and more!
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Will I Get A Refund If I Cancel The Aftermarket Product
The contract may say whether you are entitled to a refund. If it does not, contact your coverage provider, as they will determine whether you are entitled to a refund and what amount, if any, is owed. The coverage providers information is listed on the contract. To request a copy of the contract, contact the dealership or call us.
Make One Additional Large Payment Each Year
Making an extra payment every year works similarly to rounding up your payments each month, except you’ll make a payment all at once instead of spreading it out over the year. You may want to set aside money from tax refunds, bonuses, and pay raises for a hefty lump-sum payment toward your car loan.
The earlier in your loan term you make your extra payment, the more money you’ll save in interest, because your overall balance will be lower.
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I Identified My Spending Priorities
Once I secured a stable income and the paychecks started coming in, I had to decide what I wanted my dollars to do for me. At the time I took out my car loan, I was still making my final payments on my student loans. I also had to cover essentials like rent, groceries, and gasoline to get me to work.
But even with these obligations, I had dollars left over in my account, and it was up to me to decide how I wanted to spend them. Did I want to blow them on Starbucks frappuccinos, new clothes, concert tickets and artisan tacos, drowning myself in luxuries but still stressed about my bills and living paycheck to paycheck? Or did I want to max out my 401k, pad my savings account and make extra payments on my loans?
The second option isnt as glamorous on the surface, but it leads to financial independencemy true goalwhereas the first option leads to an expensive life that requires increasing amounts of effort, stress and income to maintain.
Once I established debt repayment and financial independence as my top priorities, I simply had to spend in alignment with those priorities. Which leads us to number two.
When Paying Off A Car Loan Early Isnt The Best Option
- If you dont already have a decent emergency fund saved up, build that up first.
- If you have a really good interest rate on your auto loan, youd probably be better-served by paying off more demanding debts or putting that money towards your retirement.
- If youre trying to build good credit, and you can afford to reliably make payments on your auto loan, it makes sense to keep paying off the auto loan, so you can build an attractive credit history.
- Finally, many loan contracts stipulate that there are fees for early loan termination, so make sure youre not going to have to pay extra to get out of your contract.
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Cant Qualify Refinance Your Car Loan Instead
Should I pay off my credit cards or car loan first?
When its a choice between putting extra money toward a specific debt, prioritizing paying off your credit cards can save you the most. Thats because credit cards usually have higher interest rates than car loans.
But if youre only able to pay one bill, go with the car loan. You risk losing your vehicle if you cant pay it off which can make it difficult to get to work and earn an income.
You Will Be Lured Into An Eternal Debt Trap
Unfortunately, most people will actually not be making their regular car payment on that same car in year 7.
Around year 5 or 6, theyll get bored with their current ride and trade it in for a new vehicle. Since theyll still be owing on their car loan, theyll roll the remaining balance, called negative equity, into a new car loan, effectively never getting out of debt.
Some who trade-in for a new vehicle before year 4 or 5 might actually never get out from underwater of their car loan. They NEVER stop owing more than their car is worth!
You can avoid all the above headache by simply committing to pay off a 7 year car loan way ahead of schedule.
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Round Up Your Monthly Payments
If you cant afford to pay off your car all at once or pay off your loan very quickly, dont give up. You can still benefit by putting a little more with your car payment every month. Because every extra dollar reduces the balance on your loan, you start saving on interest expense right away. You could say goodbye to car loan debt a lot sooner than you think.
Heres an example of how much youd save by paying just over $100 more each month on a 60-month, $25,000 car loan at 7% interest:
Paying extra on a car loan
|Original 60-month loan|
You can use LendingTrees calculator to see how much you need to pay each month to pay off your car loan in various time periods.
Tip #: Round Up Your Payments
Saving money isnt easy for everyone, which is why implementing little savings tricks can be beneficial. Rounding up your payments is a great way to put more money down on your principal balance and come one step closer to owning your car. Start by rounding up your auto loan payments. Choose an amount that seems doable to you, such as rounding up to the nearest $50 or $100. If your payment is $360 a month and you pay $400 by rounding up each month, in 9 months, youll have made an entire extra payment on your car loan.
Another way you can use rounding up to help you pay your car loan off faster is to round up on all your purchases. There are apps that allow you to round up all of your purchases to the next dollar so that you can save the extra money and put it toward something else. Rounding up by the hundred for your car loan may seem daunting but rounding up a $12.10 purchase at a store to $13.00 can be a lot less intimidating. And if you do it on all of your purchases, you can end up saving a lot of money to put toward your car loan.
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Reasons Why One Finds It Difficult To Pay Off Carmax Loan Early
One of the reasons why users find it difficult to pay off CarMax loan early maybe because they dont understand the terms and condition. Users will have to understand his or her credit scores to be carried out the process. To do that you will need to carefully analyze how your finance charge is calculated and with that, it will be easier for you to pay-off your CarMax Loan early.
User should also try paying bills on time because due payment is one of the reasons may is also one of the reasons why payment of CarMax Loan on time is delayed. These are some of the major reasons why it is difficult to pay off the loan on time.
Paying Off A Car Loan Early: Risks And Rewards
Paying off a car loan early is a great way to save on interest, but its worth pointing out that it may not always be an option, and it may not always be the right option for your financial situation. If you are interested in learning how to pay off a car loan early, and you want to avoid the common pitfalls, youve come to the right place.
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Option : Add Windfalls To The Loan
Every once in a while, unexpected money falls into your lap. This may come as a tax refund, a bonus from work or a rebate from an item you purchased.
When you get a windfall, put the extra cash toward the principal balance of the car loan. You can either put the entire lump sum toward the loan or divide it between other goals, like a vacation or home remodel. If you feel like splurging, put 90% towards your debt and use the remaining 10% to go shopping or treat yourself to a nice dinner.
Windfalls are great because theyre often a surprise, so they feel like bonus money. If you put a windfall immediately toward the auto loan, you wont have time to ponder how else you could spend the extra money.
If youre paying extra on your auto loan, make sure the funds are going toward the principal and not just interest or other fees. You may have to call the lender directly and ask them to apply the funds this way. If you pay via check, you should write principal on the memo portion.
Need A Different Vehicle Financing
If your current loan situation isn’t working out, and you don’t qualify for refinancing, you can still trade in your car for something with a more affordable loan you can pay off more quickly. Remember, a short loan term with payment you can comfortably afford is the way to go. This way you’re not overspending on interest just to get a lower payment. Additionally, making a large down payment upfront can lower the amount you finance, and help you have less to repay.
If you’re worried about bad credit coming between you and a car loan, we want to help. Here at Auto Credit Express, we work with a nationwide network of special finance dealerships that are signed up with subprime lenders to help borrowers in many credit situations. Simply fill out our free auto loan request form to get started today.
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Paying Off Your Car Loan For Credit Repair
If is your goal, a slow and steady repayment plan suits this situation. Payment history is the biggest part of what makes up your credit score, so the more consistent, on-time payments you can show, the better. This goes for all your bills, not just your car loan.
This doesn’t mean stretching your loan out longer to make more payments. Just keep paying as your contract states and keep up with your other payment obligations, too.
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
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What Is A Simple Interest Loan
Simple interest is a method of allocating monthly loan payments between interest and principal. The amount of your payment allocated to interest is calculated based on your unpaid principal balance, the interest rate on your loan, and the number of days since your last payment.
ExampleIf we receive a payment and it has been 29 days since your last payment, then you will be charged 29 days of interest on the unpaid principal balance of your loan. The remainder of your payment is credited to principal and reduces the unpaid principal balance on your loan.