Why Pay Your Car Loan Off Early?
There are a number of reasons why you might want to pay off your auto loan early.
Stop Paying Interest
Even if you have good credit, the money you are paying on an auto loan could be put to better use. If you are financing 20,000 dollars at 6 percent interest, you would pay over 3000 dollars in interest over the course of a five year loan.
If you have bad credit, it gets even worse. At 12 percent interest, you would be paying nearly 7000 dollars in interest with that same five year loan term. That is no small chunk of change.
Cheaper Auto Insurance
Once your auto loan is paid off, you have the option of changing your insurance coverage.
If you drop full coverage and switch to liability only, you can virtually cut your insurance premium in half. Still want to keep full coverage? No problem, simply increase your deductible and you can still lower your premium. These are things that you can not do when you have a lien holder on your vehicle.
Money For Savings
Could you think of a better use for that monthly car payment? Your savings account would surely benefit if you were able to funnel that car payment money into it. Just think about what an extra 400 or even 500 dollars a month could do to boost your retirement savings.
Proven Strategies To Pay Your Car Off Early
Obviously, there are a ton of benefits to paying off your car loan early, but how can you accomplish this goal? Here are some proven strategies.
1) Make An Extra Payment
An extra payment every year can make a big difference and shave months off of the term of your loan. And, while this might seem difficult, it is actually one of the simplest methods to put into play.
Most people are paid once every two weeks and this breaks down into 26 paychecks a year. Divide this in half and you have 13 paychecks that can be earmarked for car payments, one every 4 weeks. Simple.
2) Trade It In
If you took on too big of a car loan in the first place, trading it in can make your loan more manageable. Going this route gives you two options.
First, you can trade your vehicle in on a cheaper one and have a lower loan payment. This loan should be more manageable, allowing you to put extra money towards your principal so that you can pay it off much earlier.
Another option is to simply sell your car, pay off your note and use cash to buy a vehicle outright. If you have the money you need to do this, it will probably be the best option.
3) Refinance Your Loan
If your credit has improved since you first took on your car loan, consider refinancing it. This can benefit you in two ways.
First, you could refinance for a shorter term and keep roughly the same payment. With a reduced interest rate, chances are good that you could pay your loan off a full year early. Move from a 60 month loan to a 48 month loan or a 72 month loan to a 60 month one.
Even if you decide to keep a similar loan term, the reduced payment could help you pay extra towards your loan. Reduce your payment and use the money saved to pay down the principal directly.
4) Round Up Your Payment
This is another great method that is similar to making an extra payment each year. If your monthly auto payment is 450 dollars, for example, round it up to 500 dollars. That adds up to an extra 600 dollars a year paid toward the principal on your loan.
5) Follow A Budget
If you want to pay down your loan, you need to figure out how to free up some extra money. A budget can do just that.
Set up a budget that allows you to track where every dollar is going. Make sure that you have set aside money for all of your regular bills plus savings and categories for variable bills like food and entertainment. Once you have a budget set, you can look for ways to free up money to put towards paying down your car loan fast.
6) Use Windfalls Wisely
Whenever you receive a large amount of unexpected money, use it to pay down the principal of your loan. This could be anything from an income tax refund to a 1500 dollar bonus at work to a winning lottery ticket. You were not expecting the money, so you will not miss it and it can go a long way towards paying your loan down.
7) Make Small Sacrifices
Use smart financial decisions to pay down your auto loan. If you decide not to go out to eat at a restaurant, use the 80 dollars saved and pay down your auto loan. Pass on that new video game, use the money you would have wasted to reduce your principal. Every smart money saving decision you make can be used to pay off your loan.
8) Get A Side Job
If you find it difficult to come up with the extra money that you need to pay down your car loan, get a side job. Working just one shift at a retailer a week can earn you an extra 100 dollars a week. That is enough money to pay down your loan debt by over 5000 dollars a year. Even better, once your auto loan is paid off, keep the job and supercharge your savings.