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How to Pay Off Your Car Loan Early

By Valencia Higuera

paying off a car loanLike most everyone, I hate debt, and the thought of paying off a car loan for a number of years has always left a bad taste in my mouth. While I realize that loans can be necessary to purchase a house or pay for a college education, I take issue with the idea of financing items that unequivocally lose value.

For this reason, I’ve always resolved to pay off my car loans early. Not only does this improve my monthly cash flow, but it improves my credit score as well.

Benefits of Paying Off a Car Loan Early

The bottom line is that paying off a car loan early will save you money in interest payments. Imagine what you can do with the extra money: beef up your savings account, make home improvements, save for retirement, or perhaps pay off other debts.

Taking out a car loan can also impact your credit, as credit scores factor in your level of debt. I had a credit score of 810 when I was approved for financing, and after two months of on-time payments, I checked my credit score and discovered that it had dropped 15 points. I hadn’t missed any payments, nor had I accumulated credit card debt – the drop was entirely due to the new loan I’d taken on.

I realize that a 15-point drop isn’t too bad if your score falls within the 700 to 800 or higher range. However, if your score is within the 600 range, 15 points can be the difference between a loan approval and a denial. Though your credit score will drop after receiving a new auto loan, the sooner you pay it back, the quicker you can recoup those points.

Ways to Expedite Paying Off a Car Loan

Paying cash to buy a car is one way to avoid high interest charges and years of monthly car payments. But if you don’t have the money on-hand to pay off your car in full, a few simple techniques can help eliminate your car debt faster.

1. Round Up Your Payment

Rounding up your car loan payment is an easy and effortless way to knock a few months off your car loan term. You don’t need a lot of extra money, but the more you add to your payments, the sooner you can walk away from your loan.

To illustrate, let’s say you purchase a car for $20,000 and pay 4.25% interest for 60 months. The monthly scheduled payment based on these numbers is $371. Rounding up your payment to $400 shortens your car loan by six months. Go a step further and increase your payments by $100 a month and you can reduce your auto loan term by 13 months.

pay off your car loan early

2. Make Biweekly Payments

You’re only required to make auto loan payments on a monthly basis, but if you strike a deal with your auto lender, the company might allow biweekly payments.

The concept behind biweekly payments is simple, and making payments on this schedule will ultimately reduce how much you pay in interest. Submit half of your car loan payment to your lender every two weeks. Because there are 52 weeks in the year, this equals 26 yearly payments, or one extra payment per year. Using the above illustration, your payments on a biweekly schedule equal $185.30 every two weeks.

Continue with this schedule for the duration of your auto loan and you’ll shorten your loan by five months. Discuss this option with your auto lender first, and be sure to inquire about prepayment penalties.

3. Make One Extra Payment a Year

If you simply don’t have the cash flow to commit to biweekly payments, you can achieve the same results by making one extra loan payment per year. Use money from your tax refund and work bonuses, or take cash from your savings. Better yet, divide your monthly car payment by 12 and then add this total to each future monthly payment. This also results in one extra payment per year, and helps pay off your car loan a little earlier.

4. Avoid the Skip Payment Option

Some lenders will let you skip your payment once or twice a year. My lender encourages skip payment options during the month of December, and in the past, I always took advantage of these opportunities. However, each skipped payment extends your loan by at least one month and tacks on additional interest. Skip your payment four or five times during the life of the loan and you can add six months to your car term.

Final Word

I’ve been rounding up my car payments since applying for my last loan, and it has brought good results. At my current rate of payments, I will save approximately $200 in interest. I realize that $200 isn’t a huge sum of money over the span of five years; however, saving $200 in interest will trim about four or five months off my car loan payment. Not bad for a technique that’s so simple.

Have you ever paid off a car loan early? If so, what techniques did you use?

(photo credit: Shutterstock)

Valencia Higuera
Valencia Higuera is a personal finance junkie who enjoys reading articles on budgeting, saving money, and credit cards. She has written personal finance articles and blogs for several online publications. She holds a B.A in English from Old Dominion University and currently lives in Chesapeake, Virginia.

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  • mkatz2m

    The best thing to do is never buy a car on credit. To get in the habit of paying cash for a car, you can do like I did when I was very young. Buy a cheap used car or a good car for your first car using your own cash. Immediately open up a new bank account that will only be used for the next new car. Once you have enough for a new car, you will never need to buy a car on credit again. For your entire life, always have a large cash cushion for at least buying a car and other emergencies. It never makes sense for me to ever buy a new car on credit since it looses a lot of value as soon as you drive it off the lot. I usually keep a car until it literally falls apart (over 10 years) before I buy another one IMHO, this is an important money management way to do this.

  • Valencia Higuera

    That’s a great idea. I thought about paying cash for my car, but I figured it was safer to keep the cushion and pay down the loan faster. I like the idea of opening a separate account specifically for a future car purchase. I might give it a try.

  • http://lowcreditinterestrate.com/ low credit card rate

    Pay off debt faster is the best way to save. Because the debt has interest. The longer you pay off the debt, the interest will continue to grow. Many ways to accelerate the repayment of debt, and we can choose which one or tow that are the easiest way we do.

  • Hope K0311

    So I have always just paid cash for my vehicles up until now. I recently purchased a car with a finance company and due to the fact I had no other choice but to do so, I wish to pay down the car loan faster. I have decided I will pay extra on the 354.69 monthly car note. I just am unsure if I need to pay it with one payment or If I should put the original payment in with an additional payment. Than also how they need to be addressed to the finance company. I plan on doing an even payment to round up to 400.00 a month. At a minimum possibly more some months.I just want to make sure when I send it off I have done so correctly because I know of people who have been falsely miss lead and still had the full term of payments at the end I do not wish to be that person. So what would you suggest?

  • http://www.tinyurl.com/gotshoes Karl

    I don’t like paying interest for loans on items that loose value either. I found a way to accelerate the pay off of all debt. You could spend just 3 to 5 minutes per day on the internet and qualify for the most obnoxious amount of pay I have ever seen. I’m on Facebook. My ID on Facebook is meetkarl

  • http://twitter.com/slvrser Frank

    Paying twice every 2 weeks saves ALOT in the long run. Anyone paying say $5,000 on a loan at 20% will end up paying over $1000 just in interest rates alone in the first year under a monthly payment plan. Great way to alleviate the burden of that interest, plus the sooner you pay off the loan, the sooner you can borrow more – which could even be used to pay off credit cards if you want to get rid of them and alleviate your debt burden and improve your credit score. It’s alot easier on income to pay down a personal loan then paying down revolving credit, as long as you’re committed in not using credit cards on a regular basis after they’ve been paid off.

  • Earlwbell

    you forget the first factor to consider ….what are the interest rates..if the car loan is 2% and your taking money from say a bonds fund or cd that pays 3% you made a dumb move..the money you use to pay off a debt is earning something…its called finance 101..the cost of money on both sides needs to be considered..taking money from yourself is borrowing from your self…even if you found the money in your backyard you need to consider what you could invest that in versus paying off a loan..if you can earn 3% and you pay off a low interest auto loan of 2% you did something stupid..need to listen to someonj with a degree in accounting of finance or an mba..not someone who is not credentialed in the subject

  • Mtpkts7431

    Most car loans have a finance charge added to the principal. Paying the loan early doesn’t avoid this. Cost like a house loan.

    • Julie Bowdren

      With simple interest it does. If you research compound interest versus simple interest you’ll see what I’m talking about. Every car dealership I went to during my car search used simple interest and not compound interest, therefore every day you pay early is dollars off your bottom line.

    • Rhawnie

      No, a car loan at most places like a credit union, where I have my car note, accrues everyday and the more money you put into your note, the lower the amount you have owed on your car will be and the less interest you will be charged per day. Even though your payment isn’t due until say the 5th of the month, your car continues to accrue interest everyday from the time you make one payment until the next time you make a payment. Paying an additional payment or any additional money towards your car will drop the balance for the next day and any subsequent day after that and lower the amount of money you put out on interest.

  • http://www.facebook.com/kambing.oei Kam Bing Oei

    Wouldn’t paying more would just making the following monthly payment lower unless you make 2 checks each month?

    • Angel

      No. Paying more goes to paying down the principal balance on the car and in turn the accrued interest is less. Interest is charged on remaining balances.

  • Julie Bowdren

    I don’t know what math formulas to use, so here’s my situation –

    I went through some stuff, and my credit was just shot. I had to get a car, and my interest rate ended up at a whopping 22.9%. The amount financed was 6647 and my current balance is 6210. My monthly payment is $256 and my loan term is 36 months with simple interest. I started up biweekly payments this month, at $150 each. By the end of August I’ll have already made an extra $150 payment. How long will it actually take me to pay off my loan?

    • Julie Bowdren

      (Granted, this will be less my next tax return, which I plan to invest directly into this loan.)

    • Angel

      Using the simple interest it doesn’t matter when you make the payment your still getting charged the same interest. However, if you would have chosen an accrued interest and made payments this way and managed to make the payments at the start of the billing cycle rather than wait until the day it’s due, you avoid excess interest charges (payment due May 20th, you pay May 15th, you elude 5days of interest charges). So although you made an extra payment of $150, you’re still getting charged the same interest, you only just knocked $150 off the principal and have not eluded being charged any extra interest.

  • Dave Payoff

    Most people dont know that using the United States Government’s money to pay off your auto loan using an IPN is the best way to go!

  • Mark

    Why would someone pay $100 extra per month for the life of a 5-year car loan? Why not just get a 48-month loan and pay much less interest and at a lower rate?

    • Matt

      Not positive, but I think the reason for doing it the way the article described is because you know you can absolutely afford that amount each month for the 60 month loan. This way when you are having “good money” months or “bad money” months you know you’ll still pay off that payment. In a good month, you’d get some interest savings. In a bad month, you know you’ll still be able to afford the minimum.

      If you were to agree payment $100 more a month you might be agreeing to a payment you cannot afford on a monthly basis for 4 straight years. It’s basically just safer to go longer at a lower amount in case you lost your job or had an emergency that cut into your finances.

      Hope that makes sense.

  • Rhawnie

    I have been adding just a little bit extra to my payment since I’ve had the load on my car, (just over a year) and I have knocked quite a bit off. My payments are normally $351 and some change, but I always round it up to 352 automatically. I did this partially because I don’t like to pay change on a check like that and I wanted to add that little bit extra. You don’t realize how easy it is. Out of sight, out of mind. If I could have afforded to do less months, but a higher payment, I would have, but in order to get my payments where I felt comfortable, I had to opt for the longer term. Whenever I get extra money that I don’t have during the year (Christmas bonus, presents, etc.), I add those to my car note as well. I just bought a house, but I’m working towards paying my car note off by this next year so I can dump all of that extra money into my mortgage. If I do this, I will have close to double the amount of money I can put on my house every month and that will help me pay my mortgage off in about 1/2 the time as well. I encourage everyone who can, any amount of money extra that you can use towards these balances, do it! I would have loved to have had my car note paid off before I bought my home, but that didn’t happen. I’m looking forward to the day that all I have is a mortgage and going to enjoy it even more when that is paid off as well.

  • Tommy Lites

    Sadly, I just learned about this while buying a new vehicle the other day. The interest on this one is ‘reasonable’ at 5%, but a car I am still paying on is at 13%. The finance guy was trying to get us to sign up on a program that auto drafted payments this way (for a charge of course). I don’t like auto draft and I don’t like paying extra charges, so I am deciding to do this myself.
    Being confused about this stuff, do you need to be a payment ahead? I am unclear on how a note due 20th, you pay half on say the first, then half on or before the 20th you are saving anything.

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