You can save big money by using some simple tips to shorten the time it takes to pay off a car loan.
When you buy a car, it’s easy to rush into securing an auto loan without giving much thought to the interest that comes with it. But those payments can take a big bite out of your budget for years to come.
Fortunately, there are ways to escape the wrath of the auto loan interest monster. Here are a few simple options to consider:
1. Round up your payments
Round up to the nearest hundred dollars when you pay your bill. Not only will you pay off the car faster, but you will also save in interest expenses.
To illustrate, assume you purchase a car for $20,000 with an interest rate of 3.9 percent and term of 48 months. This yields a monthly payment of $450.69. However, rounding this figure up to $500 will shave five months off the payment term and the interest those months would have cost you.
2. Refinance to a lower rate
If you can secure a lower interest rate, refinancing may be worth a shot. However, avoid extending the term of your loan just so you can get a lower monthly payment. Typically, such a move will leave you paying more in interest over the life of the loan.
We have a tool to help you find the lowest rate car loans in your area. It’s on the Car Loan page of our Solutions Center. As I write this, where I live, there are rates as low as 2 percent!
To learn more, check out “Navigating a Car Loan Refinance for Long-Haul Savings.”
3. Make additional payments
Has Lady Luck blessed you with an unexpected sum? Use that “found” money — whether it is a tax refund, work bonus or inheritance — to make at least one extra payment for the year.
You can achieve the same result by dividing the monthly payment by 12 and remitting this amount each month in addition to your usual payment total. Using the terms of the loan example given in point No. 1 above, this method will shave three months off your payment term.
Just remember that if you plan to pay off your loan early, it’s important to speak to your lender about any restrictions or penalties that may apply for early loan payoffs.
4. Cut unnecessary costs
Do you find it difficult to scrape up extra funds to pay down your auto loan balance faster? Start by making cuts to nonessential expenses.
Need a few ideas? Skip spa pampering sessions and dining out for a while, or cut out all high-end entertainment. Also, set a grocery budget for each week and stick to it.
5. Never skip a payment
The skip-a-payment option is an enticing offer that my credit union likes to make around the holiday season to help customers free up funds for gifts and travel expenses.
However, it’s a mistake to fall into this trap, because you will have to make it up in the end. The lender simply extends the loan to account for the extra payment and accompanying interest.
6. Make biweekly payments
If you get paid two times each month — and if it is permitted by your lender — make half the monthly payment each time you receive a paycheck.
This will reduce the amount of interest paid over the life of the loan. Since there are 26 pay periods in the year, you will end up making one extra payment for the year.