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4 minutes read. Published August 17, 2022
Written by Kellye Guinan. Written by Personal and business finance contributor
Kellye Guinan is a freelance editor and writer with over 5 years experience working in the field of personal financial matters. She is also a full-time librarian at the local library where she helps her community access information about financial literacy, in addition to other subjects.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to manage their finances by providing concise, well-researched, and clear data that break complex subjects into digestible pieces.
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Provided that your lender does not charge a prepayment penalty and you can pay it off faster, this is a great option to save money. It will result in less interest — and when you’re done, you’ll have a few extra hundred dollars in your budget each month. But getting there may be challenging. There are several strategies that you can employ to pay off your loan off more quickly. However, even the best option, it could cause you to be in a more dire financial situation if you’re not aware of your strategy. 6 ways to pay off your car loan quicker There’s no one path to paying off your car loan ahead of time. In fact, it is sensible to change the method you choose to follow. Once you’ve got an idea of what you want to do, you can benefit from a variety of methods to get rid of your vehicle loan faster. 1. Refinancing with a new lender could be a simple way to pay off your loan quicker. If you decide to take the shorter loan duration, you might be able to maintain the same monthly payment — if you can secure lower interest rates. Even if you do not make extra payments or increase your monthly payments to make them more frequent, you’ll be able to be able to pay off your car loan quicker. 2. Set up biweekly payments. Although it may seem like a lot but paying twice per month rather than one time will help you get closer to the finish line quicker. It also helps reduce the cost of . The reason is that interest will be less likely to accumulate before you can make an installment — and also because you’ll be able to consistently reduce the total loan balance. This helps you move towards an earlier payoff date, without substantially increasing the amount you contribute to your loan every month. 3. Round your payments up to the nearest hundred . Similarly the process of rounding your payments will result in a minor change from month to month, but will have a significant impact overall. If you round up your payments to the nearest hundred or, at a minimum, the closest to the entire number, you’ll slowly lower the principal amount of your vehicle loan. You will also get ahead of your schedule and stay ahead of interest and allow you to make a smooth transition into a faster payment. 4. Avoid unnecessary add-ons If you like gaps insurance as well as an extended warranty or a service agreement to your loan make contact with your provider and cancel them. You’ll be able to receive a prorated reimbursement for the remainder while also lowering your monthly payment. However, instead of putting that refund into your pocket use it towards your loan. This way, you’ll owe less in total and get a lump sum payment. 5. You can make a significant additional payment Tax returns, bonuses , and other huge lumps of cash could go towards your vehicle loan. Any time you can reduce the principal amount by a couple thousand dollars is likely worth it. As with rounding your payments, and making payments biweekly, it will prevent interest from accumulating. As your loan balance decreases and your monthly payment increases, more will go toward principal, leading to the early payment. 6. Each month you should pay your loan even you’re ahead of your schedule however, you should still make payments on your loan each month. This prevents interest from accruing which means that more goes toward principal and thereby reducing the amount of amount of interest you have to pay. Making regular payments even in the absence of a need can result in paying on your vehicle loan early. If you decide not to pay off your car loan early Making the decision to pay off your vehicle loan earlier means you’ll have an extra few hundred dollars in your account every month. But in some cases, you could negatively impact your financial position more than you help and so not be the most beneficial option. Avoid paying your loan off early if: There is a penalty for prepayment. A essentially punishes you for not paying your loan in full or fully paying off your loan in advance. It is the lender’s attempt to compensate any interest charges you might have paid in the event you had kept to your schedule. If there’s a prior payment penalty, be sure that it doesn’t cost more than what you’d normally be paying in interest. The loan makes use of pre-calculated interest . The interest you pay is front loaded every year, so it is that your first monthly payment is accounted for a greater share than the last month. If you’re able to take care to pay off your loan early, you won’t substantially reduce the cost of your car loan. In this scenario it’s better to adhere to the loan schedule. You don’t have much debt. While it may sound counterintuitive the credit score you have is calculated on the types of debt you’ve got and the duration the accounts. Since car loans are long-term loans, making consistent payments for years can help to keep your credit score up. However, making payments to pay off your loan could lower your credit utilization ratio which accounts for approximately 30 % of the credit scores. If you are in debt with other creditors and have a high proportion of debt to income (DTI) eliminating one debt will help boost your score. Ways to lower your monthly car payments Aside refinancing your loan, there are two options to reduce your monthly payment by deferring them or requesting a loan modification. Deferment allows you to skip payments if you’re facing financial difficulties in the short term. Lenders may offer one to three months of deferment to ease your burden. However, deferment will only move the payments to the close of your loan which means that you’ll be required to cover them eventually. Additionally, you will be accountable for interest and at the end it will cost more. The lenders may not be as willing to alter your loan however it wouldn’t harm to inquire. Similar to refinancing, it can alter the terms of your loan by either extending your term or lowering your interest rate. If you can get a modification to your loan and lower your monthly payments without needing to sign a new loan with another lender. The next steps always be the most beneficial option to pay off your car loan in advance. If you’d face prepayment penalties or a possible hit to your credit score The savings aren’t worth the cost. If you’re looking to pay off your financial burden, reducing your car payment is among the fastest methods to free up your budget. Refinancing — or just making extra payments — is the most effective way to pay off your vehicle loan more quickly. Even if it’s just an extra few dollars per month, you’ll be able to lower your debt, and possibly take a few months off from your loan. Find out more
Written by Business and personal finance contributor
Kellye Guinan is a freelance editor and writer with more than 5 years experience working in the field of personal finance. She also works full-time as a employee at the library in her town in which she helps the community get information about financial literacy, among other subjects.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances through providing precise, well-researched and informative data that breaks otherwise complicated subjects into digestible pieces.
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