There are many benefits to paying off a car loan quickly. You save money on loan interest and improve your credit rating, to name just two. Although most financial institutions can expect you to make a car loan payment each month, there are methods you can put into your financial planning that will allow you to pay off your car loan faster and save money. Find out the details of the loan, what steps you can take, and how you can save more money to pay off the loan faster.
Steps
Part 1 of 4: Determine Current Balance and Remaining Payment Penalties
Step 1. Determine the exact amount of your remaining car loan payment
Getting the exact amount of money you owe on your car loan will allow you to make financial plans for repaying the loan. If you have an online banking, you can find this information in your account or check the monthly statement that is sent to you in the mail.
Step 2. Get a copy of the loan or bank agreement
You can request it from your financial institution in person or by logging into your personal account on the lender's website. Speak directly with a loan counselor or review the terms and conditions of your loan to determine if there are penalties for paying off the car loan quickly.
Some banks and financial institutions may charge you fees or penalties for paying off the car loan sooner than the original life expectancy of the loan, especially if you make them lose money on interest
Step 3. Calculate the savings as a result of making additional payments
You can find online loan remaining payment calculators on websites like Bankrate.com or MortgageLoan.com, where you can enter the loan interest rate, monthly payment, and remaining payment amount. You can then compare how much you can save by paying off the loan in a lump sum, making payments twice a month, or increasing the amount of your monthly payments.
If there are penalties for paying off your car loan early, compare the savings you calculated to the amount of the penalties. Then you will know if you will save money by paying off the loan early
Step 4. Check with your financial institution for recommendations for the remaining payment on a loan
Your loan advisor can educate you on the most beneficial way to pay off your car loan faster, especially if penalties apply. For example, ask the lender if they can lower your loan balance if you can pay the remaining balance in a lump sum.
In some cases, lenders can substantially reduce your remaining car loan balance if you can pay it off in one payment
Part 2 of 4: Pay the Principal
Step 1. Determine if you can make additional payments to the principal balance only
Some lenders may charge you only a fixed monthly interest, which can allow you to make additional payments of the principal amount. However, other lenders may charge you interest on every payment you make. Ask the lender if you can make payments in addition to the principal amount of the loan without having to pay interest. If so, you can plan to make small additional loan payments each month and pay less in interest over the life of the loan.
- An example of the difference between the interest rates you pay is: If you owe a payment of $ 100 each month with $ 4 of interest, this means that you pay $ 104 a month. What you need to find out is if that $ 4 is a fixed amount per month, which would mean that regardless of how much you can pay in principal ($ 100, $ 200, $ 300), you still pay $ 4 of interest per month. However, if you are charged interest on each payment, you would end up paying 4% interest on any amount you pay of the principal; for example, $ 8 if you chose to pay $ 200 instead of $ 100.
- Even if you have to pay interest, it is generally worth making additional principal payments to pay off the loan more quickly.
Step 2. Make a separate payment for the principal
Use a check or pay online to make an additional monthly payment that is separate from your regular loan payment. Write "principal only" on the check so that the lender does not count it as a loan payment for the next month.
If you pay online, pay the additional principal amount before it is charged for the next month
Step 3. Make biweekly payments
Instead of making a monthly payment, divide it in half and make payments every two weeks. This normally works out to be twice a month, but by the end of the year, you will have made two more biweekly payments (one full payment) because most months are longer than exactly 4 weeks. In other words, make 26 half payments per year (every two weeks for 52 weeks) that will equal 13 full payments. The total amount you owe will decrease faster, saving you interest on the car loan.
Part 3 of 4: Finding Additional Income
Step 1. Use the extra earnings or cash gifts on the car loan
Additional income, such as tax refunds, bonuses from your job, or birthday or holiday cash gifts could be used on your car loan, resulting in faster payment. You'll pay more in interest on your car loan than you would in a savings or money market account.
Step 2. Earn additional income
If you have time outside of your normal work hours, consider starting a side business to generate additional money to pay off your car loan. Examples of side businesses are:
- Rent a room in your home. This could be for a student or someone who is staying in your city temporarily for a job. You can advertise it on Craigslist.com or your local classifieds page.
- Mowing the lawn or shoveling snow.
- Running errands for the elderly or busy professionals.
- Buy china tableware, tools, jewelry, books, etc. at low prices at real estate sales and flea markets and then sell them on eBay.
- Offer home party sales. Check out Tupperware products, kitchen utensils, wooden baskets, jewelry, cosmetics, clothing, and garden supplies. If you organize a sales team, you can also reap a percentage of their profits.
Step 3. Use the snowball technique
If you have paid off one of your credit cards, for example, continue to pay that monthly amount on the loan. This way, you won't be tempted to spend that money on other things.
Step 4. Set a budget and minimize additional expenses
Make a list of your monthly income and expenses, including expenses that occur only once or twice a year. Then you can see if you have extra cash at the end of the month to pay off your car loan. If you don't have extra cash, look for areas where you can cut costs.
- Eliminate unnecessary expenses like cable TV channels or a landline. The money you spend on costs like these could be used instead to pay off your car loan.
- Look for lower rates on mandatory bills and expenses, such as car insurance or your Internet or cell phone bill by checking with each of your service providers about promotional or package rates. You can get auto insurance quotes online to compare with your current policy.
- Reduce your food expenses by cooking or preparing meals at home instead of eating out at restaurants. In most cases, a specific meal will cost significantly more if you buy it from a restaurant than if you buy the food or ingredients from a supermarket.
Part 4 of 4: Prepare for the next car purchase
Step 1. Ask about car loans at your bank
Banks often have much better deals than car dealerships, so consider the loans offered at your bank. Talk to a bank employee about how the loans work, how much interest they charge and what type, and if there are prepayment penalties. If you choose to get a car loan from your bank, be sure to take the bank and loan information to the car dealership so they have it.
Step 2. Don't get a car loan with prepayment penalties
Now that you've learned how to pay off a car loan faster, you know how damaging prepayment penalties are. There are many options for where to get a car loan, so next time, be sure to choose a financial institution that doesn't require prepayment penalties.
Step 3. Continue making the monthly car payment yourself
The fastest way to pay off a loan is not to get one in the first place. If you were paying $ 300 a month for your car loan and the loan has already been paid off, continue to put this money in a savings or money market account. Then, when you're ready to buy your next car, you can pay a large down payment or the entire amount in cash.
Step 4. Continue budgeting and reducing expenses
If you've started budgeting and budgeting while cutting expenses, stick to these good habits. Put any money you save in a money market account to earn interest. Or, if you don't plan to buy a new car in the next 3-5 years, you could invest this money in a certificate of deposit. Then you could make a big down payment or not have to get a loan for your next car.