Ways To Pay Off Your Car Fast
Ready to get that car or truck payment off of your back. Here are some guaranteed strategies to help you eliminate your auto loan payment for good.
Make Bi Weekly Payments
Your loan is based on a monthly payment, buy you most likely get paid every two weeks. Take that monthly payment and divide it in half. Then, make a 1/2 payment every two weeks. You will probably not feel a difference in your pocket, but what you will be doing is making an extra payment each year.
Round Up To The Nearest Hundred
Just like with making biweekly versus monthly payments, you probably will not feel this one much. If your payment is 340 dollars a month, round up to 400 bucks. It is an additional amount that you would quickly get used to and it would allow you to pay off hundreds of extra dollars in principal each year.
Cancel Your Gap Policy
Chances are good that when you bought your vechicle, the dealer talked you into adding a GAP policy. This is a good thing, but you may not need it for the length of the loan.
What a GAP policy does is pay off any remaining balance on your account should you experience a total loss. If your car were “totaled”, your full coverage insurance would pay the value of the car. Any remaining balance left over would be paid off by GAP.
If you determine that you are no longer backwards on your loan, you can look into canceling your GAP. Since the GAP policy is for the length of the loan, they would then owe you money back. The extra money would, in most cases, be applied to your loan directly which will drive down the balance.
Refinance Your Loan
If your credit has improved or if you financed your car from a dealership, you may very well benefit from a refinance.
This is especially true if you financed from a dealer because they almost always add something to the interest rate that the bank offered. This is a way for them to make money on the back end of the auto sale. Sneaky right?
Refinancing a loan could allow you to get a lower interest rate. That will allow you to save money on interest and possibly secure a shorter loan term without your payment rising. In any case, refinancing does not cost you any money, so you should look into it.
Apply Windfalls To Your Car Loan
A windfall is any large amount of money that you receive. It could be anything from an IRS refund to a bonus from work.
Take that windfall and apply it to the loan balance. Let’s say you have a tax refund and get 1400 dollars. Instead of blowing it, pay it on your car loan. That would then be 1400 dollars that you are not paying interest on for several years.
It will pay huge dividends to use a windfall to pay down your loan, especially if you do it early on.
Don’t Skip Payments
Lenders will typically allow you to skip a payment. This is very tempting, especially around the holidays when money gets a little tighter.
Avoid the temptation to skip a payment, because it will only extend the loan and increase the amount of interest that you pay in the long run.
Problems From Paying Off Your Car Loan Early
In most cases, it is a very good thing to pay off your loan early. It reduces the amount of your monthly bills, decreases the interest you pay and should allow you to save more money. There are times though when paying off that loan early could hurt you. Here are some examples.
You Have Higher Interest Debt
Paying off your car or truck fast is great, but you may have higher priorities. If you are carrying credit card debt at 20 percent, it makes no sense to prioritize your 6 percent auto loan. Pay off your higher interest credit cards first to maximize your savings.
You Need To Use Your Credit Soon
If you are looking into a mortgage or applying for a new loan, it might not be a good idea to pay off your car loan. In some cases, paying off an auto loan could lower your credit score. The reason is credit diversity.
Credit diversity is a credit score factor. Creditors want to see that you can handle a mix of credit and if you have no other installment loans, your score could very well drop. This is very common with student loans. People are so proud to finally get their loans paid off, only to see their credit score drop 20 points.
What To Do Next
Once you finally reach the goal of paying off your car loan, what should you do next?
For starters, you should congratulate yourself and enjoy not having a car payment. This is a big thing joining the ranks of those people with no car payment.
Next, you need to figure out what to do with the money. With no car payment, you could have 4000 dollars or more in extra disposable income. Don’t waste it. Put it towards other debt or start putting it into a savings or investment account.
Lastly, you need to evaluate what to do with your auto insurance. Without the loan, you are free to switch to liability only insurance if you like. This may or may not be a good thing. Yes, it would save you money on your monthly payment but you have to ask yourself if you could afford to replace your car or truck in the event of a total loss. If your car is still valuable, it is probably going to be worthwhile to maintain full coverage.