Many people take out car loans with terms as long as eight years. Car loans are usually one of the biggest financial responsibilities you’ll have, behind a mortgage.
Paying off your car loan early allows you to eliminate a monthly payment from your expenses and free up money in your budget. The longer your term length, the more you’ll pay in interest, so you may benefit from paying your loan off early.
Here are five tips to pay off your loan before your term is up.
One option to repay your car loan early is to divide your monthly payment in half, and make those payments biweekly. This way, you’ll make 26 half-payments over the course of the year, or 13 full monthly payments.
This method might not seem like it would make much of a difference. But you’ll end up with an additional payment per year, shortening your overall term length by several months. You may also save a bit of money in interest.
Instead of making the required monthly payment, consider rounding up your payments, say to the nearest $50.
For example, let’s say you borrowed $13,500 at a 5% interest rate over a 72-month term. Your current monthly payment would be about $217. Rounding your payment up to $250 a month could save you over $330 in interest over the life of the loan and reduce your term length by 10 months.
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.
Refinancing your loan can help you get better loan terms than if your credit score or financial situation has improved. You’ll want to negotiate an earlier payoff date, and you’ll likely get a lower interest rate.
You probably don’t want to refinance to extend your term length — even if the monthly payment is smaller — because you’ll end up paying more in total interest. You could also go upside-down on your loan, meaning you owe more on your loan than your car is worth. Then, if you want to get rid of your car before paying it off, you won’t just have to sell or trade it in — you’ll also have to pay the lender the difference between the value of the car and the loan amount.
If paying off your loan early is a priority for you, it can be worthwhile to take a look at how you’re allocating your money and put more toward your loan debt.
For instance, you might shave $25 off your entertainment or clothing budget and put that extra money toward your car payments. It might not seem like much, but you could pay off your loan a few months earlier as a result.
Before you pay off your loan early, look at your loan terms to ensure you don’t incur any prepayment penalties from your lender. Sometimes lenders will put these in place because they stand to make less money in interest if you pay off your loan before your term expires.
You’ll also want to figure out how much you’d potentially save by paying off your loan early. This way, you can figure out whether the savings are worth the extra payments and effort.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer. Read our editorial standards.
Business Insider may receive a commission from Media Alpha when you click on auto insurance quotes, but our reporting and recommendations are always independent and objective.
About Author
