How to Pay Off Your Car Loan Faster

If you have ever owned a vehicle, you have certainly asked yourself how to pay off your car loan faster. Having an auto loan balance looming over you can be intimidating, especially if you are not making much of a dent with monthly minimum payments. Here at Granite Hyundai in Somersworth, NH, we like to empower our buyers and provide them with as much information as possible, so this post is for you. If you're ready to pay off your car loan faster, stay tuned!

Why Paying Off Your Car Loan Early Makes Sense

Paying off your car loan faster makes sense for anyone who dislikes paying interest, added fees, and debt, as well as the stress that comes with longer loan periods. Remember, many car loans run 60 months or longer, which, for many of us, is too long to stay in the same vehicle, not to mention paying for it. A car can sometimes be a home away from home, and paying off that large debt sooner rather than later can be a financially intelligent and liberating move. Plus, when it's paid, it's 100% yours.

Benefits of Paying Off Your Auto Loan Early

The benefits of paying off your car loan early can include everything from a lower debt-to-income ratio, a higher credit score, less recurring debt each month, saved money on interest, and so much more. The most obvious pro to paying off your car loan early is that you save more money each month to spend on other important expenditures.

The average car loan lasts about 68-69 months, with new car loans slightly longer than used car loans. That is over five years of paying down a car you drive to work, school, and for leisure, which means a mountain of interest if you're not careful.

Potential Drawbacks to Consider

There are always drawbacks to consider when adjusting the repayment terms or schedule of an auto loan. The cons of doing this include potential prepayment penalties, a temporary dip in your credit score, and reduced cash availability that could be better used elsewhere. Many of us don't have another few hundred sitting around each month for additional payments, so it's not wise to try to make something happen that is not financially comfortable for you to do.

Smart Strategies to Pay Off Your Car Loan Faster

Below, we want to share a few strategies that can help pay off your auto loan faster, all without breaking the bank. Remember, your principal payment is what pays down the loan, while interest/fees accrue daily and are added to that base amount.

Make Extra Payments Toward the Loan's Principal

As we covered above, making additional payments toward the auto loan's principal can shorten your repayment timeframe. The principal of a loan is the amount you need to pay to reach zero, and the higher it is, the higher the interest will be each month. For instance, if your principal is $10,000 and your monthly payment is around $200 plus interest, you could consider paying an extra $50 or more towards the balance of your vehicle.

Refinance Your Loan for a Better Rate

If you can find a better rate for your auto loan, refinancing is a good choice. Just like with your mortgage, you can also refinance your auto loan to have better APR and terms. Most people will do this once their credit score rises enough to make a significant difference in interest rates, duration, and other factors. You can also refinance the lesser amount of debt you now have compared to before, so there are a few reasons to go this route.

Round Up Your Monthly Payments

Rounding up monthly payments is one of the easiest ways to pay off your car loan faster. If you owe, say, $325 per month on your auto loan, rounding up to the nearest $50 or $100 will help you pay off your principal much faster than before. More money into the loan means less money owed to the car or loan company.

Make Biweekly Payments Instead of Monthly

Because auto loans often work in one-month payments, you could consider paying biweekly instead. Interest on car loans accrues daily, which will be based on your current principal. The biweekly payment reduces your daily accrued interest for those two weeks, which, over time, can lower the amount of extra money you pay towards this loan.

Apply Bonuses, Tax Refunds, or Windfalls

Another easy way to pay off auto loan debt more quickly is to apply any bonuses, tax refunds, or windfalls you receive to your existing balance. If you get a bonus at work, that few hundred or thousand dollars could go immediately towards the principal balance, saving you quite a bit on potential interest that would have accrued. Lucky money can become smart money if you know what to do with it.

Avoid Skipping or Deferring Payments

Hard times come out of nowhere, but if you do not absolutely have to skip your auto loan payment for a month or so, try not to. Deferring payments or skipping payments can lead to added fees, issues with your credit score, and even collections getting involved, so you want to make sure to have money saved for these situations.

How to Stay Motivated While Paying Off Your Loan

Staying motivated when paying off a car loan faster can be hard. However, if you keep your eyes on the prize, you WILL get through your auto loan and be debt-free for the car, truck, or SUV you drive. Set goals that you can confidently achieve, and this will make it far simpler to take on.

More money for yourself is reason enough to keep making those on-time and early payments!

Set Short-Term Milestones

Short-term milestones can make a dramatic impact on paying back your car loan early. Whether it's a goal to get the principal down a few hundred dollars by the end of the month or if you want to plan by the quarter of the year/season, there are ways to break this into parts.

Track Your Progress Toward Freedom From Debt

Tracking where your money goes, how much you owe on your car, and making good progress when applying extra money to your balance can help secure your freedom from debt. Keep a spreadsheet together for the cash in and out of your bank account that goes towards this auto loan, and feel free to adjust it accordingly as you continue.

Frequently Asked Questions

Does Paying Off a Car Loan Early Hurt My Credit Score?

Yes, you can experience a temporary dip in your credit score if you pay off a car loan faster than originally anticipated. This will go away in a month or a few months, but it can be a bit of a downer, especially because you are doing the right thing.

Can I Refinance My Loan to Pay It Off Faster?

You can refinance an auto loan to get better terms and potentially a quicker pay-off date. This may not always work out, depending on your credit score, current balance, and repayment history, but it's certainly worth considering if you are interested.

Is There a Penalty for Early Payoff?

There may be a penalty for paying off your car loan early. Many auto companies and loan providers do not penalize you for paying off your loan early, but there are some that charge fees for this scenario. Always refer to your original loan documents when making early payments, and don't hesitate to contact your servicer/provider.

What Happens After I Pay Off My Car Loan?

Once you have finished paying off your car, truck, or SUV, you will no longer need to make further payments to it or the loan originator. You own your car 100% and can do with it whatever you like.

How to Pay Off a 5 Year Car Loan in 2 Years?

The best way to pay off a five-year car loan in two years will be to significantly raise the amount of money you are paying to your monthly principal. This could mean doubling it, but some estimates put this under that, depending on your debt. Every last dollar counts.

What is the 50 30 20 Rule for Car Payments?

The 50-30-20 rule for car payments refers to a general budgeting guideline that suggests allocating 50% of your after-tax income to needs, 30% to wants, and 20% to savings and debt repayment. Therefore, paying off your car loan faster would fall into your 50% and 20% categories, with the normal payment being a necessity and the additional repayment being 20% of your leftover income.

Get an Auto Loan at Granite Hyundai

Granite Hyundai of Somersworth, NH, is here to assist you with your next auto loan and purchase. We have a top-rated team ready to guide you through the loan process, as well as provide advice on paying down debt more effectively and efficiently in the future. Money can be stressful, especially when you owe it, so we are always there to lend a helping hand right down the road. Contact us or stop by our dealership today!