How To Pay Off Your Car Loan Faster: 7 Ways To Know

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Looking to pay off your car loan faster? Making biweekly payments, refinancing or putting extra cash toward your loan can help you save on interest and own your car sooner. Here are some effective ways to speed up the process.

1. Make Extra Payments Toward the Principal

Even if you add a couple of extra payments toward your car loan principal, it can potentially shorten your loan term and reduce the interest you pay. 

Imagine you had a $25,000 loan at 6% interest that was 60 months long. Here’s how extra payments can reduce how much you pay.

Principal vs. Interest: What’s the Difference?

• Principal: This is your original loan amount. 
• Interest: This is what the lender charges you to borrow the money. The faster you pay off the loan, the less interest you will pay. 

2. Round Up Your Car Payments

You can chip away at your loan amount quicker if you round up the amount you pay every month. You can ask your lender to round up the amount, or you could automate the loan payment so that it rounds up automatically.

3. Switch To Biweekly Payments

If you pay biweekly payments instead of monthly payments, you’ll end up making the equivalent of one extra full payment per year. This approach could reduce your interest by several hundred dollars. 

4. Apply Windfalls or Lump Sums

If you receive a raise or bonus from work, a tax refund or another cash windfall, apply those funds to your car loan. Another strategy that works well is to make lump sum payments. 

5. Refinance for a Better Rate

If you can secure a lower rate for your car loan, it may be helpful to refinance. Take a look at the pros and cons of refinancing. 

6. Cut Expenses and Redirect Savings to the Loan

You could examine your budget and determine if there is anything you can cut. Consider eliminating subscriptions, skipping that latte at the cafe or packing your lunch at home.

Once you build enough savings, redirect this amount to your car loan. 

7. Don’t Skip Payments or Extend the Loan

Try not to miss any monthly payments because it could result in late fees and extra interest. If you can avoid it, do not extend the loan. It will automatically add to the amount you owe in interest. 

Is It Smart to Pay Off a Car Loan Early?

Yes, for the most part, it is smart to pay off your car loan early. There are four reasons why: 

1. You save money on interest payments.
2. You free up cash that can be used to pay off other debts.
3. You own your car without any existing liens.
4. You can potentially improve your debt-to-income ratio.

Will Paying Off a Car Loan Early Help Your Credit?

Paying off your car loan early could help you with your credit score. It can show the following: 

• Strong payment history: By paying off your car loan early, you show that you’ve saved enough to not only make payments on time, but also before the loan comes due. 
• Increases your ability to pay off other debt: By freeing up the cash you used to pay off your loan balance, you’ll be able to make payments on other debts.
• May reduce your debt-to-income ratio: Reducing your debt is seen as a positive by lenders. 

When It Might Not Be Worth Paying Your Car Loan Off Early

Paying off debt may not always be a win for your finances. Here are cases in which it isn’t beneficial to pay off your car loan: 

• You’re borrowing from your emergency fund. It doesn’t make sense to deplete your savings to pay off your car loan early. 
• There is a prepayment penalty on your car loan. Some car contracts penalize you for paying off your loan early. Check your contract before deciding to pay off your loan. 
• You have higher-interest debt. Making payments on higher-interest debt — like credit cards — is more beneficial than paying off a car loan with a lower interest rate.
• There are investment opportunities that yield higher interest. It doesn’t make sense to pay off a car loan with minimal interest if you have an investment opportunity that will give you a better yield.

How To Check if a Lender Charges a Prepayment Penalty

Here are a few ways to find out: 

• Check your contract and look for terms like “prepayment penalty” or “early payoff fee.” 
• Call your lender directly and ask, “Will there be a prepayment penalty if I pay off my loan early?”
• Ask how the extra payments are applied. You want your extra payments to be applied to principal and not exclusively to future interest. 

Example: How Much You Can Save Paying Off a Car Loan Early

If you take out a car loan for $25,000 with 6% interest for five years, here’s how much you can save if you decide to pay it off in three years. 

Final Takeaway: Choose the Payoff Strategy That Works for You

Take a holistic approach when deciding which strategy you’d like to use to pay off your new or used car loan.

It may make sense to pay a little extra every month by rounding up your payments, or you may decide that biweekly payments work better for you. It is important to look at the rest of your finances to decide which strategy works best for you.

Make sure there is no early penalty for paying off the loan — you can read your contract or contact the lender to find out.

Andrew Lisa contributed to the reporting for this article.

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