How Do I Finish My Car Loan Early?
A car salesperson
Buying cars can be really exciting, but your favorite car may be accompanied in the driveway with something that is a lot less fun - an auto loan. Most American auto consumers buy both, new and used cars, with the help of auto financing.
Since cars are getting more and more expensive, the American debt for a new set of wheels has been growing exponentially. This includes the terms of loans as well, for instance, the standard repayment period has jumped through the decades, from just 3- to 4-years to 5- and 6-year loans and now even 7-year loans are available to buyers.
These new loan terms may be great for car manufacturers and lends, but they are a thorn in the backside of car buyers. You see, the longer you take to pay back the loan, the more you end up paying, not to mention the car loan interest rates.
If you wish to get rid of your car loan faster, here are a few tips to get you debt-free in no time:
1. Split Monthly Payments Into Two Smaller Payments
This particular tip is probably our favorite because it is quick and painless. Once you have divided your monthly payments into two, you'll notice a miraculous change in your monthly budget. What's even better is that this strategy allows you to pay off your auto loans faster while nabbing you some savings for interest as well.
Here's how it works: let's say that your car loan has monthly payments of $400 due, on the 5th day of each month. Instead of making just one payment of $400 right before your deadline, you should split your obligations into two sets of $200. In doing so, you could make one payment on the 15th and the other on, perhaps, the 30th.
Not only will you be paying your monthly payment earlier than before, but you will also reach the loan principal amount before it was scheduled. In other words, you will end up owing less interest as compared to paying your entire monthly payment right before its deadline.
Note: Make sure that your lender hasn't set aside terms and conditions that penalize you for early loan repayment.
2. Make Additional Principal Payments
Another very effective strategy of reducing the length of your loan is to pay over and above your minimum monthly payments. Again, this strategy is only effective if your lender hasn't set a penalty for prepayments.
If your budget allows you to overpay small amounts above your minimum monthly payments, then we advise you to try it. For the best results, you should even call your lender to let them know that this extra money is meant to cancel out the loan principal.
Since interest will be accrued based on the remaining principal balance you owe, reducing this balance as quickly as possible would reduce your overall interest amount. This can also be viewed as a more efficient use of your funds as compared to paying your next minimum monthly payment early - since this includes both, principal and interest.
Ideally, lenders who do not have a penalty for early repayment also have a standard formula to use for payments that are above your monthly payment. While some may apply these extra payments to the principal amount, others may credit your next month's outstanding payments. If the latter is the case, you should specifically instruct them to apply these extra payments to the principal balance.
3. Make Use of Unexpected Incomes
If your monthly budget does not have extra room for payments that are above the monthly minimum payment, don't worry. You can still use this strategy to pay off auto loans way ahead of schedule.
Most of us are lucky enough to find a little extra cash along the way and you could do more with these incomes than simply make additional monthly payments. Instead, you could plan to apply a portion of your 'windfall' incomes to make lump sum payments that reduce your overall debt.
A windfall signifies any extra income you were not expecting and is above whatever you earn to pay for your needs. This could be in the form of an income tax refund, an additional income for pulling off a great gig, some birthday money from your parents or even a bonus from your superiors at work.
It might seem like a great idea at first to let your windfall income be an additional pad for your monthly budget, however, this will only make your income evaporate without making a significant dent in your liabilities. However, if you plan ahead and direct a significant amount of this income (anything above 50%) toward debt repayment, a large portion of your liabilities will vanish before your eyes.
4. Round Up Your Payments
Among the easiest strategies to get rid of your car loan early is to round up your monthly installments to a whole number. Naturally, since you're paying higher than you owe per month, you will make an exponential impact as the months progress. Also, this tip will help you understand that every little change in your monthly payments can make a difference.
Here's how it works: if your minimum monthly payment is $333.03 and your monthly budget allows you to round up this figure to the nearest $50, then you should pay $350 per month. Alternatively, you can also round up to the nearest $10, since it will inevitably shield you against your car loan interest rates.
Additionally, if you are accustomed to automatic electronic payments, whether directly or via your checking account, it is quite likely that you wouldn't even remember how much you're paying extra and will continue to live with the rest of your available finances.
5. Refinance Your Auto Loan
If you experience significant improvements in your financial life, for instance, if your credit report improves substantially, then you could also look for some auto loan refinancing options with your credit union or bank.
You can improve your credit score by:
- Paying off other debts
- Lowering your debt : income ratio
- Removing any errors in your credit report
All of these strategies (and more) can be used to improve your credit score and could facilitate refinancing options with lower car loan interest rates.
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