A long auto loan term helps keep your payments more manageable, but also results in paying a significant amount of 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. Before you reach that point, follow these tips to learn how to pay off your car loan faster and free up your monthly cash flow.
7 tips on how to pay off a car loan faster
#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 towards 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, serving as a great tip for how to pay off a car loan faster.
#3: Round up each car loan payment
Another idea is to round up your car payment each month in order to pay off your car loan faster. For instance, say your car payment is $450 a month. If your budget allows for it, try paying $500 a month instead. In this scenario, you would knock off an extra $600 per year of your loan balance. Just remember that anytime you make extra payments, clearly mark it as an extra principal payment. Otherwise, your lender may simply count the extra money as a prepayment of your payment for next month.
#4: Make one additional payment each year
On top of these tips for paying off your car loan faster, also consider making an additional payment each year. One method is to make the extra payment from your budget just one time a year. Or, set up a savings account to put away a little bit each month and then use the funds for your extra car payment. If your car payment is $450, then you’ll just need to save around $37 a month to make an extra payment a year. Paired with some of the other loan payoff strategies, you could make a serious dent in your balance in just one year.
#5: Choose one personal expenditure to put towards debt
Another tip for paying off your car loan is to cut your spending. But you don’t have to do a total budget overhaul to make a difference; instead, choose just one area to cut back on. Then put that extra cash towards an additional loan payment each month. 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 set amount for just a single week a month. Just one minor change gives you one more opportunity to get rid of that car loan for good.
#6: Put extra income toward the loan
Anytime you receive some type of extra funds, consider putting that cash towards your car loan. This could be in the form of a tax refund, side hustle money, or a salary increase. Rather than automatically spending the extra cash, put it towards that car loan balance. It’s really like a two-fold investment. First, you’ll save money in the long run by paying less interest. Second, you’ll free up that cash in your budget that you once used for your car payment. Instead of paying several hundred dollars a month for your car, you can save or spend it elsewhere.
#7: Earn passive income
Depending on your other financial responsibilities, you may want to earn some extra income to help tackle your auto loan. But even if you don’t have the time or inclination to launch a side hustle, you can set yourself up for passive income. In fact, you can even use your car to earn cash to put towards additional payments.
Leave your car at one of Avail’s neighborhood locations (either while on a trip or for a few days when you don’t need it) and let someone else rent it. Every trip is protected by Allstate insurance and you get paid for each day your car is rented. Even if you did this for just one weekend a month for a year, you could earn hundreds of dollars to pay down your car debt — without actually having to work.
By now you’ve probably discovered several ways of how to pay off the car loan faster. Start off by picking and choosing one or two strategies to start with (like biweekly payments), then add on some of the more dramatic actions (like putting your tax refund towards 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.
