How to Pay Off Your Car Loan Faster
You can pay off your car loan faster by talking to your lender, using smart payment strategies, or making additional money.
Written by R.E. Fulton
Reviewed by Jessica Barrett
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You can pay off your car loan faster by talking to your lender, using smart payment strategies, or finding additional money. If you’re having trouble keeping up with payments, you should also consider refinancing your auto loan.
Since auto loan terms can last from as long as five to eight years, managing those payments can be a major challenge. Your
car loan
is one of the biggest financial obligations you have, so finding a way to pay off the loan faster is a great way to up your finances. But how do you do it without hurting your credit—or running out of money? One great way to pay off your car faster is to find a lower rate on
car insurance
with help from Jerry
. As a licensed broker and trustworthy super app
, Jerry can help you find savings on your insurance that could free up money to pay off your auto loan a few months early! Here’s everything you need to know about paying off a car loan faster, including information on how to do it, how it could affect your credit, and how Jerry can help make it happen.
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Check your current balance and payoff penalties
The first step in speeding up your loan payments is to determine your current loan balance and calculate how much money you’ll save by paying it off early.
Next, check to see if your lender charges a
prepayment penalty
for paying off a loan early. Because companies want to receive more payments in interest, they might try to prevent you from paying early. Some companies will charge a fee for early payment, and some won’t allow early payment at all, so it’s important to check with your lender before you try to pay your car off faster. MORE: How to refinance a car
If they do charge a penalty for early payment, compare it to the savings you calculated, as the money you save may cancel out the penalty.
If you’re able to pay your auto loan off early, you’ll need to make sure that all your payments go to the principal of the loan. Many companies will automatically apply payments toward interest instead, so check with your lender first and specify that your checks are going toward the loan principal.
Key Takeaway: Your lender may not want you to pay off the loan early. Check your institution’s policies and ask about prepayment penalties to make sure the savings outweigh the cost.
Use strategies to pay off the principal
Once you’ve decided to pay off your car as early as possible, you’ll have to decide what strategy you want to use to make your payments. Here are a few options you should consider.
Make biweekly payments
In general, you make loan payments once a month, meaning that you make a total of 12 payments per year. But if your lender will allow you to pay half your monthly bill every two weeks, you’ll end up making 26 half-payments a year.
That adds up to 13 full payments every year, meaning you’ll get to pay off the loan a few months early. You’ll save money on interest, too.
Round up your monthly payments
Instead of splitting your monthly payments in two, just round the amount up to the nearest $50. Let’s say you took out a loan for $15,000 at a 9% interest rate for 60 months. With that loan, your monthly payment is $311, and you’ll pay $3,683 over the life of the loan.
If you round your monthly payment up to $350, you’ll pay off the loan at least seven months early and save about $440 in interest.
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Make one large extra payment per year
Instead of adding a little extra to each payment or increasing your payments by one a year, arrange with your lender to make one large additional payment each year. By biting off a bigger chunk of the loan principal once a year, you’ll reduce the time you’re paying off the loan and avoid paying more interest than you need to.
Key Takeaway: You can work extra money into your monthly payments to shave a few months off the loan term, or you can arrange to make one big additional payment each year.
Find extra money
If you’re trying to pay your car off faster to save money, finding extra money might feel impossible—but it’s not! Here are a few strategies you can use to generate some additional funds to help you pay off your debt early.
Snowball debt payments
This strategy is also known as the avalanche method, but it doesn’t have anything to do with snow. Instead, this method has you pay off small debts first to free up money to apply to your larger debts (like your car loan).
The key to success when using the snowball or avalanche method is to avoid taking on new debt, which can slow down your progress towards paying off your car.
Use tax refunds and bonuses
That refund or bonus check could buy you a nice vacation—or it could be the key to paying your car off faster. You can also apply the additional monthly funds from a pay raise to your car payment, speeding up your loan term by reducing the principal faster.
Find an additional source of income
Getting a side hustle can help you save up extra money to pay off your auto loan faster. Look for unconventional odd jobs that you can complete in your free time, like walking dogs or mowing lawns—or opt for a passive form of income, such as renting out a room in your home.
Reduce unnecessary expenses
Look over your budget and determine which expenses you can go without temporarily. If you can live without cable for a few months or cut down on takeout orders, you could save enough to pay your loan off a month or two ahead of schedule.
Key Takeaway: Finding extra money through debt abatement strategies or a new revenue source can allow you to pay off your car early.
Save money on car insurance to pay off your auto loan faster
One of the biggest monthly expenses for car owners is
car insurance
—so find a lower rate to save money for your car payment! Download the Jerry
app and answer a few easy questions about yourself and your car, and Jerry will find competitive quotes from top insurance companies within seconds! Jerry users save an average of over $800 a year, which could go to an extra car payment or cover an increase in your monthly payment.
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FAQs
Does paying off an auto loan early hurt your credit?
It depends. If paying off your loan early lowers your debt-to-income ratio, it could improve your credit score. Being able to show that you’ve paid off one big installment loan might work in your favor in future loan applications.
However, paying off an auto loan early could limit your credit diversification if you don’t have another open installment loan, such as a mortgage, personal loan, or student loan.
What happens when you pay off your car?
When you’ve paid off your car loan, you’ll receive the title to the car from the DMV. Once you’ve received the title, you should consider updating your insurance policy to find a rate that fits your needs.
Download the Jerry app and you’ll get expert assistance shopping for insurance as a new car owner.
Is it better to pay principal or interest on a car loan?
Always pay off the principal first since it’s the part of your loan amount that won’t change. Interest changes over time depending on how fast you pay off the loan, so if you reduce the principal early, you’ll pay less interest.
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