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As a borrower who is committed to a car loan, learning how to pay off car loan faster will help you become financially free and improve your lifestyle and goal. But then, how do you pay off the car loans fast? All those questions will be answered in this content.
A lot of people especially modern drivers are involved in car loans and this loan may just be one of the biggest financial responsibilities they are committed to and worst of it is, the monthly payments get larger, terms get longer, APRs get higher, the debt from that new or used car loan just keeps getting worst becoming a serious burden for you. And you are now looking for how to pay off car loan faster. Luckily for you, there are several ways to pay off your car loan faster and remove a large expense from your monthly budget. All of that will be discussed here, keep reading.
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How Long Does It Take To Pay Off A Car Loan
Paying off a car loan takes several months if you go by the standard duration. The most common car loan term is currently 72 months, however, there is another loan term of 84 months. So, if you are struggling with paying off your car loan and thinking the duration is too long, then you have nothing to worry about because there are countless people facing the same issue. However, the good news is that it is very possible to pay off your car loan faster than the stated terms. All you need is the right mindset, motivation, and money management skills.
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Is Paying Off Car Loan Early Important?
One good thing that comes with paying off a car loan early is that it gives you the opportunity to save money on interest and improve your credit score.
So, if your car loan’s interest rate is high, the longer the loan’s terms, the more interest you pile up. But if you are able to pay off the loan early before the period ends, you can actually save money by not having to pay as much interest.
According to statics by the credit reporting agency, monthly payments for vehicles range anywhere from $550 for new cars or $390 for used cars. While monthly lease payments on the other hand fall between these figures, amounting to $452 on average. These numbers will be much higher if you keep a low credit score, poor credit history, or miss payments.
If you do decide to pay off your car loan faster, while the account is still open for the loan’s full term – this will show investors that you made your payments on time, and will potentially boost your credit score.
Car loans constitute a significant portion of the average American’s monthly expenditure, and they are often large obstacles on the path toward pure financial freedom. Therefore, the faster your car debts are paid off, the faster you can become financially free and your personal wealth can be grown and managed. Applying an actionable plan for paying down personal car debt is an excellent strategy for removing excess financial burdens that affect your lifestyle and goals.
How to Pay Off Car Loan Faster
Alright, let’s now discuss how to pay off car loan faster. Here are 8 successful strategies that you can apply to quickly help you cut down your car payment and eventually pay off faster than you think.
1. Don’t Skip Payments
If you really want to pay off your car loan early, you need to know the first rule of thumb – which is never to skip a payment for any reason. I understand that having auto loan payments can be costly and sometimes a big burden and you might be tempted to skip a payment or two especially when your lender is granting you permission. You should know that skipping payments will only take you further away from achieving the goal of paying off early. And it will also increase the term of the loan and make you pay more interest which you are trying to avoid.
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2. Reduce Your Loan Term Length
To achieve this, make up your mind not to skip a payment. A loan term is the period of time a debtor or borrower is allowed to pay back the funds provided to them by the bank. These loan terms are usually measured in months and can last anywhere from 24 to 84 months in length depending on the terms of the agreement. Usually, the longer the loan term length, the smaller the monthly payback.
However, increasing the loan term will not help pay off faster even though it helps reduce the amount you pay monthly. It will only end up enslaving you for a good number of years – imagine taking as long as seven years to pay off in full, a car loan that may not even be in good working condition by the time you are done with the payment.
Reducing your loan term will ensure you are able to pay off fast and become free of your car debt. Ensure you chose a loan repayment length that reflects your personal financial goals, taking care to calculate your monthly payments using a financial calculator.
Finally, you need to also know that shorter-term loan lengths usually lower interest rates. They are an excellent way to reduce total payments and conserve your financial resources.
3. Try Refinancing
Refinancing is where you take your loan and negotiate a new monthly payment and pay-off date. You should adopt this if your current auto loan came with high-interest rates and other monthly fees. This will help you get better terms and a lower payment. However, you need to have a good credit score for you to be able to qualify for better loan terms. This can be true if you’ve been making your monthly payments in full and on time.
Although refinancing makes little sense since you don’t want to lower your monthly payment and lengthen the term of your loan thereby paying the same principal amount with increased interest. So, you should only do this if it gets you a lower monthly payment and/or a sooner pay-off date.
But if you are unable to qualify for a lower monthly payment or a sooner payoff date, then you should not worry too much about refinancing. The goal is to pay off the loan early and move on.
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4. Make Biweekly Payments
Another great strategy that will help you pay off your car loan early is biweekly payments. Changing your payment frequency from once a month to twice a month means you will be making an extra payment every year.
This is a great idea especially if you have been meeting all your monthly payments without any issues. You can do this by taking your car loan payment and dividing it in half and making the payment every two weeks. When you do this, your loan balance will continue to decrease and you will pay less interest on the remaining loan.
For example, there are 52 weeks in a year, which means not every month has just four weeks. Some months have more weeks which is why people who get paid every other week actually receive three paychecks in April and September. If you pay 50% of your car loan every two weeks, you’ll end up paying two extra half payments every year, which adds up to an extra payment on your loan.
Let’s say: You make A $500 monthly payment for 12 months – this will equate to $6,000 per year – (12 x 500 =6,000)
On the other hand, a $250 bi-weekly payment made for the same 12 months will amount to 26 times the payment and give you $6,500 per year
(26 x 250 = 6,500).
Doing this will eventually reduce your interest payments over time since you’re decreasing your remaining balance at a faster rate.
5. Add a Side Gig
Having an extra source of income goes a long way in helping people achieve their financial goals. This is very important for those who are unable to meet up with their loan requirement. If you are able to raise your income, it will not only help you pay off your debt on time, it will enable you to amass wealth for yourself.
When you earn more, you are sure of throwing some into repaying your debts; either car loan, house loan, student loans, etc., and this will enable you to pay off any debt faster with ease while you still have some savings.
So, try to look for ways to add extra income to your finance by getting a side hustle or side gig. Below are some side gig ideas you can try.
- Social media influencer
- Working weekends or overtime at your primary job
- Having a garage sale
Whatever the second job you are looking for, always make sure it is sustainable and enjoyable as this will help you work with ease and reduce fatigue.
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6. Make a Huge Sum of Payment Once a Year
So in number 5, I talked about getting an extra source of income by getting a second job or gig. If you are able to achieve this, then you should be able to do number 6 with ease. And if you are the kind that likes rounding up your payments to the nearest $50, you will also like this strategy.
When you make one large payment once a year, you are essentially rounding up one month’s payment. It doesn’t matter the time or period of the year you do this, all that matters is that you are able to achieve it.
This means if you commit to paying an extra $500 per year. It will really help you save big on interest. Assuming you borrow about $10,000 over 60 months at 10% interest. If you make an extra payment of $500 a year, you will repay the loan in 49 months, having paid $2,279.35 in interest — and you would have saved $468.88 in interest.
7. Review and Cancel Add-Ons When Necessary.
Addons may be good but sometimes they may also contribute to the unnecessary payments that are slowing down your loan repayment.
Sometimes, car drivers agree to these addons in their car loans without knowing how much extra they cost and the negative effect it will have on their loan repayment. If you realize that you have been driving your car smoothly and don’t need these extra forms of protection that comes with the add-ons, you can review them and cancel them so as to decrease your loan payment.
Here are the common types of add-ons
- Guaranteed Asset Protection (GAP) waivers
- Service contracts
- Tire and wheel warranties
- Extended warranties
To identify these add-ons, you need to look at your paperwork. Some of them may still be useful or even necessary, however, you could remove those that are not necessary. Doing this may even get you a partial refund or a credit for some of the expenses you already covered as a result. You need to see your lender or dealership about what steps you can take to cancel unwanted add-ons,
8. Cut Down on Expenses
If you want to repay your car loan early and become financially free, you need to reduce your extra expenses. Imagine what that extra money would help you achieve if you cut them off and put the money into repaying your loans.
You could ditch cable, your landline, or other monthly payment. You could also cut down your entertainment, dining out, or shopping budgets as all of these will help you free up some extra cash that can go into paying off your loan.
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FAQs About Paying Off Your Car Loan Early
How Do I Get Out Of A Car Loan?
Following the strategy I outlined in this article will help you pay off your car loan early. However, if you are tired and just want to get out of the car loan asap, then you could consider paying it off once if you have the cash, refinancing it, selling the car to an individual/dealership, or trade-in the car for a less expensive one.
What happens if I pay an extra $100 a month on my car loan?
If you commit to paying extra towards your car loan, the principal of the loan goes down more quickly. This reduces your interest rate and you will end up paying less interest overall in the long run, which will eventually help you pay off your loan early.
What Happens When You Pay Off Your Car?
When you finally pay off the car loan, the lender will send the title or a statement of lien release to you.
In a situation where the lender holds the title until the loan is paid off, once you’ve paid off your loan, and your lien is satisfied with all payments, the lien holder will send you the title of a release document within a given time frame. Once you are in possession of the documents, follow your state’s protocol for transferring the title to your name.
How do I make sure the extra payment goes to the principal?
You can do this through phone payments. Call your lender to make an additional payment toward your principal. Ensure your account information is ready. Most importantly, tell the person you’re speaking with that you want to apply your additional payment to your principal. And make sure you receive confirmation.
Which is Better? Paying the Principal Or Interest On A Car Loan
Paying the principal is much better. – since the principal is the main amount you borrowed to pay for the vehicle. Plus, the interest fees can change based on how much principal you still owe each month – this means reducing the principal amount and also reduces the interest rate. So, by reducing the principal early, you reduce how much you have to pay in interest.