How to pay off your car loan faster

A long auto loan term helps keep your payments more manageable, but it will also end up costing you a significant amount in interest over the years. Additionally, the longer term you have, the older your car will be by the time you pay it off, increasing the likelihood of needing more frequent repairs or even a new car altogether. Because of these issues, it’s a smart move to try to pay off a car loan faster. These tips will help you understand what options you have and set aside additional money to accelerate your repayment schedule. 

When not to pay off your car loan

It sounds counterintuitive, but there might actually be valid reasons why you shouldn’t try to pay off your car loan faster. For one, if you have other debts that carry a higher interest rate than your auto loan, it’s recommended to prioritize paying those down first. Secondly, there may be a financial penalty associated with early loan repayment. Before you start setting money aside to pay off your debt early, check the terms of your auto loan to see if you’ll be charged a fee for paying more than your regularly scheduled amount or for paying off the entire loan balance early. If the associated cost is greater than you’re expected to pay in interest over the term of the loan, then this wouldn’t be a wise financial move.

You should also consider the repercussions of no longer having access to the funds you’re using to repay the loan. Could that money have helped you reach other financial goals? Will this lump-sum withdrawal lower your liquidity so much that you may struggle to meet other financial obligations? In the end, if you are not really saving that much money by paying off your loan faster, then it may not make financial sense to do it.

Tips for paying off a car loan faster

If you’ve taken our advice above — to review your financial situation and terms of your loan — and are ready to move forward with paying off your loan faster, consider these seven ideas for achieving that goal. The best approach would be to combine two or more of these options to really accelerate your timeline.

1. Refinance to a lower interest rate

There’s no sense in paying more for your car loan than you need to. You could potentially refinance your car loan to get a lower interest rate. Check if your credit score has improved since you originally took out the loan, or if rates have dropped in general. This will lower your monthly payment and the total cost of the loan. To pay off your car loan faster, keep making payments at your previous amount. Just be sure to designate the extra funds to go toward the principal — not your next payment, which includes interest. 

2. Switch from monthly to biweekly payments

This is a simple trick that chips away at your auto debt without causing you to feel overburdened. The idea is to get in an extra payment each year without feeling a pinch. When you make one payment a month, that comes to 12 payments a year. Instead, split your payment in half and pay every other week. Since there are 52 weeks in a year, you’ll end up making 26 half payments — or 13 full payments. You’ll quietly sneak in an extra payment a year so that you can pay off your car loan faster.

3. Round up each car loan payment

Another idea to pay off your car loan faster is to round up your monthly payment. For instance, say you owe $450 a month. If your budget allows for it, try paying $500 a month instead. In this scenario, you would contribute an extra $600 per year toward your loan balance. Just remember that anytime you make extra payments, clearly mark it as an extra principal payment. Otherwise, your lender may count the extra money as a prepayment for your next month. 

4. Make one additional payment each year

Another way to pay more money toward your principal is to make an additional payment each year. If your monthly car payment is $450, you’ll just need to save $37.50 a month to make an extra payment at the end of the year. If you have the liquidity to make the payment, then go for it! Or, you can set up a savings account earmarked for this purpose and make regular deposits to reach your goal amount for the additional payment.

5. Cut one purchase and divert the funds

Cutting your spending in one area and diverting those funds to loan repayment is another way you can pay off your car loan early. Here’s an example: Instead of vowing to never eat out again (and let’s face it, probably setting yourself up for failure), try skipping just one meal out a month. Or try to cut your grocery budget by a certain amount each time you shop. Or review the subscriptions you have and cancel any that you don’t use. This may seem like a small move, but it will help you evaluate your habits and better understand what you are potentially overspending on so that you can instead use some of that money to pay down your debt.

6. Put extra income toward the loan

If you receive windfall or extra funds, consider putting that money toward paying off your car loan faster instead of spending it elsewhere. This could be in the form of inheritance, a tax refund, side hustle earnings or a salary increase or bonus. Since you weren’t expecting to have that money, you shouldn’t feel financial strain when putting it toward your auto loan. In fact, you’ll later reap the benefits of paying off your loan early and no longer needing to set aside money monthly for payments. Paired with some of the other loan payoff strategies, this one could help you make a serious dent in your balance.

7. Earn passive income to pay off your car loan

Getting to the point of earning passive income from a business venture can take years. But lucky for you, you can make extra money without much effort through car sharing, particularly with Avail. Car sharing allows car owners to rent out their vehicle to local drivers and make money. This is a great option for those days when you don’t need to drive because you’re working from home, enjoying a staycation or traveling out of town.  

Some car sharing companies make the car owner manage bookings, communicate with borrowers and do in-person key exchanges, but that’s not the case with Avail. All you do is list your eligible car on the platform and then park it in a designated spot and drop off the keys. Avail takes care of the rest so that you can actually earn passive income. They even guarantee you will make at least $50 every week your car is listed, even if it doesn’t get booked by a driver. Sharing your car on Avail for just one week every month can help you earn hundreds of dollars a year that you can use to pay down your loan balance — without actually having to work!

Now that you’ve learned how to pay off your car loan faster, it’s time to make a plan. Start off by choosing one or two strategies to start with (like biweekly payments), and then add one of the more impactful actions (like putting your tax refund toward your loan). 
Major changes happen incrementally. Even something as simple as sharing your car through Avail can have a major impact on paying off your loan early.