How to Pay Off a Car Loan Faster
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No one is fond of having a car loan, even if you love the car you drive. It is a huge household expense that most people have at one point or another in their lives. Unless you live in a city where public transportation is prevalent, chances are you need a car to get to work, go to school, buy groceries, visit friends and family, go to the doctor, and many other reasons. If you can pay off a car loan faster, you free up money to spend on other things. Whether you use the extra cash for entertainment or to pay off other bills, there are several methods you can try to rid yourself of this monthly expense.
Refinancing a car
Refinancing a car has several advantages. There are several ways to refinance a car, most resulting in lower payments. Depending on the condition of the car, its age, and how much you owe, often you can get a better interest rate.
A lower interest rate equates to lower payments. Sometimes you can get a lower interest rate and shorten the term of the loan. In this case, your payment may not change much, but you will pay off your car loan faster.
Benefit of bi-weekly payments
Typically, a car loan is set up so that you make one monthly payment. However, you can split up your loan so you can make a payment to your lender every two weeks.
For example, if you pay a loan payment of $300 per month, it would equate to $3,600 a year. However, if you divide that payment in half and pay $150 every two weeks, you would pay $3,900 a year. By making bi-weekly payments, you are essentially paying one extra car loan payment per year because that would equate to 26 payments in a year.
This allows you to pay off the car loan faster because you are accruing less interest and paying the balance quicker. Just remember to set up the arrangement with your lender so you pay on time and do not break any terms of the loan.
Rounding up car payments
Another way to pay more towards your car loan is to simply round up your monthly payments to the next highest amount that you can afford. For example, if your loan is $276.15 per month, you can round up and pay $300 per month.
By doing this, you would pay almost $300 extra per year, which equates to a little more than one extra payment. It gives you the same benefit of bi-weekly payments as far as paying less interest and paying off your car loan faster.
Utilizing extra funds
Once in a while, people are surprised by a windfall. Maybe you got a larger than expected tax return this year. Perhaps you had a garage sale, selling enough to earn an extra $500 in cash. It’s even possible a distant relative passed away and left you a small inheritance.
If you can afford to take this extra money to use towards your car loan, you can pay it off faster. Even if you only use part of it, any additional payments you make early on your loan will help you pay it off sooner.
Often times, a lender will offer you a small interest reduction if you sign up for different programs or account options. It is very common nowadays for banks to offer a 0.25% interest reduction if you enroll in automatic payments.
This allows the bank to get their payment on time, reduces the need for and cost of paper bills, and saves your lender the postage expense to mail the bill to you. It is a win-win for both parties. You save in interest costs and the lender saves in the maintenance of the loan.
However, remember that if you cancel your automatic payments, you will lose the rate reduction.
Paying off a car loan faster is a great way to get your hands on extra money. You can use the money for another purchase, to put away for retirement or vacation, to save for unexpected expenses, or whatever you choose. Whether you decide to refinance, make bi-weekly payments, round up car payments, use extra funds, or take advantage of loan discounts, anything you do to pay off your loan quicker will benefit you in the long run.