Paying for your car is probably one of your biggest monthly expenses. Understanding how to pay off your auto loan faster can help you save a lot of money, even if you have one of the best car loan rates. Home Media’s appraisal team will give you strategies for paying off your auto loan sooner and when it may or may not be right for your financial situation.
Should you pay off your car loan sooner?
The first step to paying off your car loan early is to determine if it’s a good idea to do so. While getting rid of your car payment seems like a major benefit, it might not always be the best financial decision.
How to use a car loan calculator
Before trying to prepay your auto loan, see if it would really benefit you. The extra savings might not be worth the adjustments you would need to make to your budget.
One of the easiest ways to find out how much you can save is to use an auto loan calculator. These tools allow you to enter different scenarios, such as higher monthly payments, and see how they would affect your loan. You can even see what your payments would be if you refinanced your car loan at a different interest rate.
When should you consider prepaying your car loan
There are many situations when it makes sense to pay off your auto loan faster than your contract provides. Here are some of the most common:
- You have a raise or extra money: If you recently got a raise or a tax refund or received unexpected extra funds, you may be able to afford to make larger payments.
- You want to be debt free: When you pay off your car loan, you go from a debt to an asset. This could increase your credit score in addition to removing a monthly obligation.
- You have a high interest rate: You may have had to settle for a high-interest loan when you bought your car. Paying off your loan early can significantly reduce the amount of interest you pay over the life of the loan, especially when your rate is high.
- You want to save money: Paying off your car loan early reduces the amount you pay in interest. Depending on how quickly you pay off your loan, the savings could be substantial.
- You have a variable rate car loan: With interest rates on loans going up, it may be a good idea to pay off your car loan sooner to avoid being hit by a higher rate.
When you might not want to pay off your auto loan sooner
Paying off your auto loan faster isn’t always the best solution. Here are a few situations when it may not be wise to pay off your car loan faster:
- Your car loan has prepayment penalties: Some loans come with penalties for early repayment. In this case, you cannot save money by repaying earlier than expected,
- You can’t really afford it: Stretching out to make extra payments on your car loan might seem like a good idea, but if you end up needing to borrow money, it can hurt your financial situation.
- You have other debts with higher interest rates: In many cases, the interest rate on a car loan is lower than the rates for credit cards, personal loans, student loans and other types of financing. If you have loan debts with higher interest rates, it usually makes more sense to pay them off sooner.
5 ways to pay off your car loan faster
If you have decided that it makes sense to opt for prepayment of the loan, you have several ways to do so. Your best option depends on your personal financial situation and financial habits.
#1 Refinance your car loan
Auto loan refinancing gives you the option of getting a new interest rate and loan term. If you can afford higher payments, you may be able to get a refinance loan with a lower interest rate and shorter term.
However, a refinance loan is just a new car loan for a vehicle you already own. It may incur the same additional fees and costs as other loans, so include those costs in your calculations.
#2 Split your bill into two bi-weekly payments
At first glance, making half your auto loan payments every two weeks may seem neutral. However, this will result in 26 payments in a year instead of 12. This means that you will make an additional monthly payment each year.
#3 Make a big payment
If you’re earning extra money from a job bonus, tax filing, or another source of supplemental income, making a large lump sum payment for your car loan can help you pay it off faster. This is especially true if your lender expects additional payments beyond the required debt payment towards the principal. It will also reduce the amount of interest you will be charged in the future.
#4 Round up your car payments
Any extra money you pay for your car loan will help you finish paying it off sooner. Simply rounding up your payment to the next $50 or $100 increment can go a long way. For example, if your car loan payment is $365 per month and you are paying $400 per month, you will have paid an additional $420 for your loan after one year, more than a month’s payment.
#5 Review additional car expenses
You may be paying for things you don’t need with your car loan. Dealerships usually roll things like insurance gap and car guarantees in purchase loans. In some cases, you can get a partial refund by terminating this coverage, which lowers your monthly payment. If you continue to make the same payment as before, you will pay off your auto loan faster.
How to Pay Off Your Car Loan Faster: The Basics
For many people, ending car payments can be a game-changing financial decision. When it comes to paying off your car loan faster, you have several options. Whichever way you choose to go about it, first make sure you’re in the right position to take advantage of the prepayment of your remaining car loan balance.
Should You Pay Off Your Car Loan Faster: Checklist
To help you decide whether or not it makes sense to take out your auto loan early, we’ve created a checklist. If you check off most or all of the items on this list, it’s worth considering how you can pay off your car loan faster:
- You can save a lot of money by paying off your loan early.
- You can achieve other financial goals by eliminating your loan repayments.
- You can afford to make larger payments or one large payment.
- Your loan has no prepayment penalty.
- You have no other debts with higher interest rates.
- You can refinance your loan without too many additional costs.
Our recommendations for auto loan refinancing
A refinance car loan can be a great way for you to pay off your car loan faster, provided you get affordable rates from a reputable lender. Researching quotes from providers allows you to compare them and see who offers you the best refinance rates. We recommend that you begin your search with one of the following providers from our list of the best auto refinance loan companies.
Automatic approval: first choice for refinancing
In our review of the best car loan providers, Auto Approve was named the top choice for refinancing. As a refinance-only lender, Auto Approve offers competitive rates to borrowers who want new loans to pay off their auto loans faster. The company also has a very simple online application process and does not charge prepayment penalties.
Keep reading: Auto Approval Review
MyAutoloan: best low rate option
For those looking for refinance loans, myAutoloan’s market model is worth a look. Rather than asking borrowers to search for lenders, the site allows borrowers to submit their information and lenders to come to them. This makes comparing offers simple and efficient.
Additionally, myAutoloan is open to borrowers with credit scores as low as 575. This means people with less than stellar credit histories can also find refinance auto loans.
Keep reading: myAutoloan review
Because consumers rely on us to provide unbiased and accurate information, we’ve created a comprehensive rating system to formulate our ranking of the best car loan companies. We’ve collected data on dozens of loan providers to score companies on a wide range of ranking factors. The end result was an overall score for each vendor, with the companies scoring the most points at the top of the list.
Here are the factors taken into account by our assessments:
- Reputation (25% of total score): Our research team considered ratings from industry experts and each lender’s years in business to assign this rating.
- Prices (25% of the total score): Auto loan providers with low APRs and high loan amounts scored highest in this category.
- Availability (25% of total score): Companies that cover a variety of circumstances are more likely to meet consumer needs.
- Customer experience (25% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness and helpfulness of each lender’s customer service team.
*Data correct at time of publication.