Is your auto credit weighing on your finances and preventing you from taking full advantage of your new wheels? Not only can paying off a loan faster can help you reduce your expenses, it can also help you reduce the amount of interest you would otherwise pay over the life of the loan.
There are a number of ways to take back control and pay off your car loan faster, including:
Assuming your car lender allows you to make additional payments without penalty, this feature is one of the easiest ways to pay off a car loan faster. You’ll also get the added benefit of reducing the overall interest you would otherwise have paid by reducing the loan principal more quickly.
Maybe you have money to give as a lump sum, for example from a tax return or a bonus, or you can commit to increasing ongoing payments. Either way, making extra payments on your car loan can help shorten the loan term, freeing you from that debt sooner than you expected.
A lump sum payment
A common auto loan option offered by dealerships, a lump sum payment allows borrowers to make lower monthly payments over a shorter loan term. Then, at the end of this shorter loan term, you agree to make a one-time lump sum repayment on the loan balance.
The lump sum payment is usually a large part of your car loan, so it’s important that borrowers can budget and afford that final repayment before applying. If you are looking for a faster car loan, this is an option that may be suitable for borrowers who will have the funds available to pay off the lump sum or who intend to sell the vehicle and use the profits to pay off the loan.
Increased frequency of payments
Another way for borrowers to pay off their car loans faster is to increase the frequency of payments. Auto credit repayments are monthly, bi-monthly, or weekly, with most borrowers opting for monthly repayments.
If you have chosen an option other than monthly, you can potentially make an additional month of repayment. For example, if your monthly repayments were $ 800, you would pay $ 9,600 per year. But for bi-monthly repayments, you would pay $ 400 over 26 weeks, and weekly repayments, you would pay $ 200 over 52 weeks; which means you would pay $ 10,400 per year. Use our auto loan calculator now to find out how much you could save by refinancing.
This option only works if your lender allows the bi-monthly repayments to be exactly half of the monthly repayment amount. Be sure to check with your auto lender for estimated repayments at different frequencies before you opt for this.
Shorter term refinancing
Finally, one option that auto loan borrowers may have to pay off their debt faster is to consider refinancing a shorter term loan. This option comes with its own risks, though, including potential breakage fees if you have a fixed loan and higher repayments due to your shortened loan term.
If you had a 5-year, $ 20,000 car loan at 7%, your repayments would be $ 397 per month. By refinancing a 3 year auto loan with the same loan balance and the same interest rate, your repayments would be $ 618 per month. You would save two years over the original term of your loan and save $ 1,529 in interest charges.
Keep in mind that not all auto loan providers allow borrowers to make additional payments or refinance a fixed loan at no cost. Be sure to check with your lender and read your loan terms and conditions before proceeding.