Ready to get rid of that pesky auto loan? Take these steps to be free of car payments sooner.
When you drove off the lot in your shiny new car, you probably didn’t mind at that moment being on the hook for car payments for at least a few years. After all, financing a new vehicle is the norm, and many Americans consider monthly car payments just one more expense they must put up with in order to enjoy having a nice ride.
Those car payments can be pricey, however. The average car payment is around $563 for new vehicles, $397 for used vehicles and $450 for leased vehicles, according to loan marketplace Lending Tree. The average loan term: 70 months for new cars, 65 months for used and 37 months on leased vehicles.
However, just because the length of your loan is four or five years doesn’t necessarily mean you can’t pay the vehicle off sooner. With a payoff strategy and some discipline, you can get rid of your car loan sooner, save on interest and free up money for savings or to pay off other debts.
1.Find out if there’s a prepayment penalty
Before you start hitting your car loan with additional or larger payments, check with the bank that financed your loan first. If you contact the lender, ask whether the bank will charge a prepayment penalty if you pay the vehicle off before the end of the loan term. You can also look at the Truth in Lending disclosures and the loan contract to find out if there is a prepayment penalty fee.
Ideally, the time to find out if there’s a prepayment penalty is before you sign the vehicle loan documents. If a potential lender won’t budge on the prepayment penalty term, you may want to keep shopping until you find a lender who won’t impose a penalty for paying off the car early.
2. Make two payments a month
Dividing your monthly payment in half and then making bi-weekly payments adds an extra payment, 13 payments in 12 months. This method helps you save on interest, since you are paying down the balance more quickly.
3. Make larger payments
Just because your car payment is $400 a month doesn’t mean that’s all you can pay. To pay the loan off faster, add to the payment due amount, making sure you designate the additional amount to go towards the principal, not interest.
Need some motivation to fork over more money each month? Input your loan terms and amount into an online auto loan early payoff calculator to see how much you can save on interest and the additional payment needed each month to pay off your loan by a certain date.
4. Refinance for a lower interest rate
If your credit score, income and/or other financial circumstances improved since you took out a vehicle loan, you may want to consider refinancing for a lower interest rate. Aim for a shorter loan term while you’re at it so you can pay off the loan faster, especially if you plan to pay extra on principal every month.
5. Apply tax refunds and bonuses
It’s tempting to spend a big tax refund or work bonus on a vacation, new electronic devices or other fun stuff. But if you apply hundreds – or, if you’re lucky, thousands of dollars – from a tax refund or bonus at your job to the loan principal, you can knock down your car loan balance significantly.
6. Make a larger down payment
If you can hold off on buying a new vehicle until you have at least a few thousand dollars for a down payment, your auto loan will be smaller. A lower loan amount may give you the option of paying off the car much sooner than if you financed the entire amount of the purchase price.
7. Earn additional income from a second job
Want to pay off your car loan as quickly as possible? Take a second job or start a side hustle such as pet sitting, lawn care or another service to earn extra cash. Then pay all the extra earnings towards your auto loan principal.
Sure, you’ll be working hard for a while, but just think how great your life will be when your car is paid off. Oh, and you can use that money saved on monthly car payments for vacation road trips in your pretty – and still fairly new – car, truck or SUV.
Published by Debt.com, LLC