How to Pay Off a Car Loan Faster & When Should You Do It?

The interest rate for a five-year car loan in the United States is around 5.27% on average and it’s important that you repay your loan because vehicles are secured loans. 

Secured loans are business or personal loans that require you to provide some kind of collateral as a condition of borrowing. If you don’t repay your loan, the lender will repossess the car. 

That makes this debt a priority. Paying it off early can not only offer you peace of mind but also gives you extra financial security.

There isn’t just one right way to pay off your auto loan earlier than expected. In reality, switching up your strategy makes sense. You can use a few techniques to pay off your car loan more quickly after you have an estimate of how much you could save.

1. Make biweekly payments

Pay twice monthly rather than just once. If you can afford it, this is one of the easiest ways to pay off debt sooner, and you can set it up for autopay to guarantee payments are sent out on schedule. This strategy will lower the overall amount of interest you pay and is likely to raise your credit score.

2. Round up

If necessary, increase your monthly payment by a few dollars and cents. Although it won't help you pay off your debt as soon as making two payments each month, doing this could eventually result in your loan term being shortened by one or two payments. Add whatever extras you can afford, then alter your budget to reflect this.

3. One-off payments

Some people may have jobs where they get an annual bonus right before the holidays. You might spend it on Christmas purchases or a nice vacation. Instead, consider using it for your auto loan payment. Clearing a large chunk means you pay a lower interest rate and clear the amount much more quickly.

4. Don’t miss payments

As obvious as this might seem, try your hardest not to miss any payments. There may be late or missed payment fines imposed, which will slow you down and make it take longer to pay back the loan. Moreover, your credit score will drop.

5. Refinance

If your credit score was less than perfect when you purchased the car, you may have a high-interest rate. To reduce interest costs, wait a year, make all of your payments on time, and then submit a refinancing application. Apply for an unsecured personal loan to pay it off in full if the debt is low enough.

6. Use a tax refund

This may not apply to all, but many people in the US may receive a tax return at the end of the tax year. If you do, use it to pay off some of your auto loan, as you're taking care of what is likely to be your second-highest monthly payment.

7. Take on a side job

Start getting creative and think of ways you can make extra money on the side. If you take on a side job, or maybe even declutter the house and have a yard sale, use the extra money towards your car loan. For some, this might not be feasible, but every extra penny counts!

It isn’t always a good idea to pay off your  auto loan early Sometimes it can have a negative impact on your credit. 

Here are some potential drawbacks of paying off your car loan early:

1. Less money for personal expenditure

If you are having financial difficulties, you may decide to spend your money on necessities instead. Even if it feels good to pay off a car loan early, it is not worthwhile if there are more urgent needs for the money.

Try paying off the debts with the highest interest rates first. That way, you'll spend less money paying down your debt in the long run.

2. Early payment penalties

Being penalized for paying off bills before they are due may seem unusual, but it can happen with auto loans. If you pay off your debts early and forgo the extra payments that the lender anticipated, then you may suffer prepayment penalties.

Prepayment penalties are not always mentioned in loan agreements, so make sure to check the fine print.. If the prepayment penalty on your current loan is significant, it is probably preferable to pay off your car according to the loan's regular timetable.

3. Credit mix

Maintaining a car loan might occasionally be beneficial for demonstrating your dependability in repaying debts. This typically applies to those who are still working to establish their credit history.

Your credit score could decline soon after you pay off a car loan early. That's because your credit mix, or the variety of credit kinds you retain, accounts for 10% of your FICO report. Learning how to raise your credit score will help you avoid this tiny decline, which will typically be transient for most people.

You have a few possible ways to reduce your auto loan payment if you're having trouble keeping up with payments or would want more leeway in your budget.

• Down payment – Paying extra cash upfront will help you avoid having a high monthly payment when you finance a vehicle. Lower monthly payments over the course of the loan are made possible by a greater down payment, which reduces the amount you must borrow. Also, the less you borrow, the less interest you will pay.

• Trade-in – One alternative is to trade in your car at the dealership, deduct the remaining money from the loan, and then buy a less expensive car. You might not receive the best price for the car, but it’s worth exploring.

• Speak to your lender – It's crucial to inform your lender as soon as possible should you experience any financial difficulties. They might be able to help with a short-term solution to help you get back on track. After all, your lender would rather that the loan be returned than for you to go into default and force them to seize the car.

If you’re worried about unexpected charges and the potential headache around financing, then there may be a better option for you.

At FINN, we offer a hassle-free way  to secure a car – by using a subscription model. Drive the newest car models with insurance and roadside assistance included in one monthly rate. 

There is no need to negotiate, just select the car you like, enter a few details, and arrange your free delivery.

If you don’t want the complexities of financing and car loans, or maybe you just want to upgrade your car every 6-12 months – then a FINN car subscription might be the option for you.

There is a lot to consider if you’re thinking about paying off your car loan sooner than what was previously agreed, and you need to consider the pros and cons.

Paying it off quicker might sound great on paper, but it really depends on your financial history and personal preference.

It’s worth remembering that an auto loan is a priority bill, and you need to make sure you don’t miss any monthly payments. If you do, speak to your lender about a short-term solution.