For many people, buying a car is an enjoyable experience. What isn’t enjoyable is making monthly payments until you own the vehicle outright. If you finance the purchase of your vehicle, you are going to find yourself making a payment every month to your lender.
Generally speaking, car loans range in length from 12 to 72 months. The longer the term, the more money you are going to pay in interest. However, there are steps you can take to pay off your car earlier than expected. Just because you opt for a 72-month loan does not mean you have to wait this long to pay off your vehicle.
How to Quickly Pay Off Your Car Loan
1. Pay Extra Every Month
Every month, send in a little bit of extra money added on to your base payment. One of the best ways to do this is to round up your payment to the next “simple” number. For example, if your payment is $260 per month, you could decide on a round number, such as $275 or $300. The more you add, the quicker you will pay off your loan.
2. Switch to a Biweekly Payment Plan
By switching to a biweekly payment plan, you will essentially be making a payment every two weeks for half of the full payment you currently make once per month.
While it may appear that you’ll have paid the same in the end, there is actually one very big difference: With a biweekly payment plan, you end up making 26 half-payments per year, or 13 full payments. This works out to one additional full payment per year. However, you’ll need to check with your lender to see if this payment plan is available to you.
3. Make One Big Extra Payment Per Year
It does not matter when you do this – if at any point during the year you have extra money to spare, making a large payment can take a major bite out of your car loan.
Last year, I decided to pay an extra $2,500 after making my October car loan payment. This payment cut my remaining balance in half, but it was not the first time I employed this strategy. If you wish to make a big reduction on your car loan and work toward paying it off sooner, this is one of the most efficient ways of doing so.
4. Refinance Your Loan
This is only beneficial if done properly. Some consumers make the mistake of refinancing to a longer term to lower their payment. While it is true that your monthly payment will decrease, the amount of interest that you actually pay over the long haul may increase. Before you do this, work out all the numbers to ensure that it is beneficial to you and not the lender.
Remember: When you refinance, you should continue to pay the same amount monthly as you did under the previous terms - despite having a lower monthly minimum payment amount due. By doing so, you are actually paying extra per month, even though you are not required by the lender to do so. And because you refinanced to a lower interest rate, you’ll pay off the loan quicker than you otherwise would have.
5. Use Your Tax Refund
Every year, I make it a habit to put some or all of my tax refund toward debt. Is this fun? Not really. But it goes a long way in knocking out debt that would otherwise hang around for a long time.
Last year, I received a large refund thanks to a few tax credits that I qualified for. In turn, I was able to throw a couple thousand dollars at my car loan. When combined with paying a little extra every month and a large payment toward the end of the year, my loan balance was greatly reduced over the course of several months.
There is no rule saying that you have to pay your car off early. In fact, most people never even consider the option. But if you are tired of making a monthly payment and want to save on interest, this is a strategy to consider. Imagine the relief you’ll feel when you realize that your car loan has been finally paid in full and you own your vehicle outright.