How to Pay off Your Auto Loan Early
The process of getting a new car loan can be exciting but also seem overwhelming. There’s the mental load of knowing you'll be making payments on your new ride for years to come. But it doesn’t have to be as hard as it might seem if you commit to paying off your loan with a strategic plan in place.
Making on-time payments over the lifetime of your loan is a great way to build your credit history and invest in your financial future. This will also help in qualifying for lower rates and more competitive borrowing terms down the road. When you pay your car loan off faster, you’ll be able to save more of your hard-earned money and time.
Below we’ll give our advice for strategies on how to pay off your auto loan early, so keep reading!
Know Your Loan Terms
Believe it or not, some lenders actually charge you to pay your loan off early. This is called a prepayment penalty. Check the fine print and make sure you don't owe any fees or penalties if you decide to go this route. At Members Heritage, we allow you to pay your loan off whenever you’re ready—without any penalty!
If you decide to pay your loan off early with a lender that has a prepayment penalty, determine if the extra money you’ll owe is worth it. If it is, consider setting up a separate savings account with extra funds from your income to ensure you don’t run into any surprises down the road.
Shop The Best Rate
The interest rate for your car loan can change depending on your chosen lender. Do your research by shopping around to get the most competitive rate possible. Every time you apply for a loan, each lender will check your credit history. This is typically referred to as a credit pull or a credit inquiry.
But don’t worry, rate shopping is not designed to hurt your credit score. Similar credit inquiries within a short time frame are normally counted as one single inquiry on your report. In the end, getting a great rate ensures an affordable monthly payment that you'll be able to pay off faster!
Double Up Your Payments
When you make payments more frequently, you’ll pay less in interest over the lifetime of your auto loan. Instead of making monthly payments on a loan, try making a payment every two weeks. Less interest will accrue because this way, your payments will be applied more often.
These payments are applied to your principal loan balance which is basically the balance still left to be paid on your loan. You’ll see this balance shrink significantly and quickly leading to a faster payoff—and more money in your pocket!
Make A Bonus Yearly Payment
If you can’t make bi-weekly payments, but like the idea of an extra yearly payment, you can accomplish the same goal by committing to a large lump sum payment during the year. Common sources for a large sum bonus payment might be your tax refund, employment bonuses, inheritances, or gifts.
When you get a chunk of cash like that, it can be tempting to spend it on something you don't really need, but you’ve had your eye on it for a while. But remember, one large lump sum payment can be a huge help with paying off your loan early because it would significantly reduce the total balance of your loan.
You can also spread that extra payment throughout the year. Divide your monthly payment by 12 and then add that cost to your payments all year long. This way you’ll be making an extra payment while hardly feeling the pinch.
Cut Unneeded Expenses
While making drastic cuts may not be needed, it could be beneficial to find out where extra expenses are coming from and which ones you can eliminate. If you find expenses for small things like streaming services, subscriptions or memberships are adding up—but you’re not really using them—kick that expense to the curb and put the extra cash toward your auto loan.
Give every dollar a purpose. The sooner you pay off your loan, the sooner you’ll have those extra funds to add back into your monthly budget!
Find Affordable Insurance
If you’ve had the same insurance company for a while, you could be paying a much higher monthly amount than you should be. Do a little research and find out where you can get the best deal for each of your policies. If you can bundle your home and auto insurance, you could set yourself up for huge savings.
Check and see if you need to keep full coverage for your auto insurance. If not, consider dropping the total coverage or lowering the amount. Just make sure you are staying within your state’s guidelines for auto insurance minimums.
Refinance for Better Savings
We’ve covered some strategies for paying off your auto loan early but you may be curious about refinancing. Refinancing could make the most sense for you, especially if it can help you pay down the loan sooner.
If interest rates have dropped since you took out your loan or your credit has improved, read our guide below to learn how to refinance your loan!
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