How to Pay Off a Car Loan Faster

Ultimately, the decision to pay off your car loan faster comes down to what wins out: the advantages or disadvantages. It’s often a question of financial situation and forecasting at the core. If you’re unsure how car loans work, your payments are divided across your loan term, with interest payments incorporated based on your purchase price and what interest rate you negotiate. While an early payoff can help you save on interest payments, it may not be the best financial move in your current situation. 

Paying off your car loan faster than the current end of your loan terms can help you alleviate debt. Here are additional reasons why you might pay your auto loan off early: 

• You have extra cash 
• You want to minimize debt to improve your credit
• You have a high interest rate
• You have a variable interest rate auto loan (and rates are forecasted to rise) 
• You want to reduce your debt-to-income ratio

For many people, seeing only a few thousand dollars left on their car payment can compel them to make a final balloon payment to own the car outright. As tempting as such a financial move might be, it’s worth investigating first, just like figuring out what a pre-approved car loan means before filling out numerous pre-approval applications. The cost of being debt-free with early repayment could be steeper than you think. 

Sometimes, an early loan payoff can come back to haunt you. For example, you shouldn’t pay off your car loan if: 

• You anticipate having less money to spend in the next few months to a year
• Your lender charges a prepayment penalty 
• You don’t have another installment loan to round out your credit mix
• Your auto loan represents your only form of credit utilization 
• You can’t afford it 
• You have other debts with higher interest rates or balances 
• You just began making loan payments

At this point, it’s a good idea to start brainstorming the pros and cons of repaying your loan and continuing as normal. In terms of personal finances, you may find that one path brings you more benefits than the other. 

If you’ve decided to pay off your car loan faster, you’ve opened up another bevy of choices. However, remember that continuing with your payments is critical. Set up automatic payments or give yourself reminders so you don’t miss a payment and increase your debt with late fees. Below are ways you can pay off your car loan faster. 

1. Double up on payment due dates

When you’re looking for a car loan, you may research how long you can get a car loan for to extend your payments for a lower monthly rate. However, making biweekly payments can help you whittle down your auto loan balance and receive the car’s title in the mail sooner. There are two methods for doubling up on payment due dates: 

1. Making a payment every two weeks: By making half your monthly payment every two weeks, you can effectively pay an additional month’s balance on your car loan. Although that might not seem like much, it can really add up.
2. Paying twice your monthly payment: Theoretically, you can pay off your car loan in half the time if you pay double your monthly payments. However, interest charges can vary based on when they’re compounded and when you make double payments. 

For many people, making half their monthly payments every two weeks is more manageable than doubling their payments. However, it depends on your financial situation and how you prioritize debt.  

2. Round up

One of the more popular alternatives to making extra payments or doubling up for borrowers is rounding up each payment to the nearest $50 or $100. If you can do this, you can chip away an additional $600 to $1,200 annually. That’s between $1,800 and $3,600 across three years, a significant dent in any auto loan debt. 

3. One-off payments

Should you receive a bonus or windfall, consider putting some of it in savings and some down on your auto loan. Decreasing your auto loan by even a few thousand can help you pay less for your car overall and reduce interest payments. One or two additional payments can help you shave off a month or two. 

4. Refinance

If you’re unsure what credit score is needed to buy a car, the typical answer is, “The higher, the better.” However, that’s not to say you’d have difficulty finding no-credit-check, no-proof-of-income car dealerships. With so much happening in the world right now, lenders of all creeds can get you behind the wheel of a car by refinancing your loan at a lower interest rate. 

The caveats to refinancing include a hard credit pull, additional administrative fees, and a point of diminishing return. If you only owe $3,000 or less on your auto loan, refinancing to get a new loan probably won’t save you enough money to be worth the trouble. However, if your credit score has increased significantly or interest rates have dropped, it might be a good time to consider refinancing. 

5. Use a tax refund

Most people take their tax refunds and splurge on themselves, but getting out of auto loan debt could be the stress relief you’re looking for. If you got a substantial tax refund this year, set aside some funds for yourself, but do the math to see if you can reduce your debt for an even better tax season with a lump sum payment. 

6. Take on a side job

Having extra money just to pay off your car loan can help you free up other funds for high-interest debt (like credit cards or payday loans). Seasonal jobs often help boost your income at the end of the year. You may even find that your side job supplements your income year-round for even more savings. 

7. Review add-ons and extras

When you were sitting in the finance and insurance (F&I) office when you bought your car, you probably heard several spiels about extended warranty products, protection packages, and GAP insurance. If you opted for any of those but have since changed your mind, contact the dealership to see if you can cancel. Although you may not get a full refund, any money you do receive can go right back into the loan.