6 Ways To Pay Off Your Auto Loan Early
Purchasing a car is one of the biggest financial decisions you will make. Car loans often stick with you for a long time – sometimes up to five or six years. Having a car loan can also impact your credit, your budget, and the longer you have a car loan, the more you will pay in interest.
One option to think about is trying to pay off your auto loan early.
Should I pay off my auto loan early?
A lot can change over a loan term. Maybe when you got the loan, you had a lower-paying job, higher rent, or other monthly budget limitations that dictated how much you could pay monthly. Maybe you have just decided that you’d rather put more money toward your car loan to save money in the long-term.
Regardless of why you’ve decided to pay more towards your auto loan, this is a great way to decrease the total interest that you pay over the life of the loan. Paying off your auto loan early can get you to full ownership faster, giving you more room in your monthly budget once the car is paid off.
However, despite the benefits, it’s important to consider the potential limitations associated with paying off your auto loan early. Some car loan companies may charge you a penalty if you pay your loan in a shorter amount of time than the initial terms. Talk with your loan company to figure out if this applies to you and how much it is.
Paying your loan payments on time every month can also boost your credit. If you have poor credit and are trying to build up your score, it may be a good idea to keep the loan, as paying it each month will lead you toward a better score.
If you’ve decided to pay off your auto loan early, here are some tips to help you accomplish just that.
1. Re-evaluate your budget
If you’ve recently changed jobs, moved to a different apartment, or come into some money, you may have different budgetary needs each month than when you originally applied for the loan. It’s a good idea to sit down with your monthly budget and re-evaluate where your income is going, and if you have extra room to put additional money toward your auto loan.
2. Round up
Rounding up your car loan payment each month is a clever strategy to pay more towards your loan without thinking about it.
For example, if your loan payment is supposed to be $375, rounding up to $400 each month can help you put an additional $300 towards your loan payment each year.
3. Make an extra payment every year
If you know that there’s a particular time of year where you always have extra money - whether it’s from tax returns, holiday bonuses, or high commission times at work, try and put some of that money aside to make an extra payment once per year.
4. Pay half of your monthly payment every two weeks
One sneaky way to make an extra payment is to pay half your monthly payment every two weeks instead of once per month.
If you do the math, you’ll actually make 26 half-payments per year instead of 24. This means that you will have paid an extra month at the end of the year without even thinking about it. This can work well if you get paid biweekly. Be sure to check the terms of your lender before doing this, though.
5. Avoid skipping payments
While not skipping payments won’t necessarily get you to the finish line faster, it will keep you from prolonging your loan terms. It may seem tempting to take the option to skip a payment or two, especially if your lender allows it with no penalty. However, skipping payments adds up in time and interest.
6. Refinance your loan
If your credit score is significantly better now than when you originally took out the loan, or the economy has changed since your loan began, it may be a good idea to look into refinancing your loan. This is when you get a new loan and use it to pay off your existing loan.
Refinancing often has fees associated with it, so you’ll want to be careful not to end up with a loan that takes more time to pay off or has higher interest rates. Confirm that if you refinance your loan, the benefits outweigh the costs.
The best way to pay off your loan on time or early is to make sure that you don’t overspend in the first place.
When you purchase a vehicle, purchase one within your budget and price range. This will ensure you can make your monthly payments, and maybe even pay a few extra every year.
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