Introduction
Car loan repayment is a big decision, but it doesn’t necessarily have to last as long as the loan period you signed up for. There are several ways of paying off your loan and by doing so you can shorten the payment period and save on interest charges. Whether you are a new car owner who has just taken a car loan, or one who has been paying for his/her car loan for some time now, there are several options available to help you pay off your car loan faster.
At Automatic Car Credit, we know how crucial it is to have financial freedom, that is why we have put together this guide to enable you to pay less interest on your auto loan and pay off your balance early.
Why is it beneficial to pay off your car loan earlier?
Paying off your loan ahead of schedule has several benefits:
Save on interest:
The more quickly you can reduce the principal balance, the less interest you are going to accrue on the loan.
Own your car sooner:
In most cases, when you have early cleared your loan, the car is all yours, this leads to more freedom.
Improve your credit:
On the other hand, the ability to repay a loan is beneficial to one’s credit score and thus accessing credit in the future will not be a challenge.
- Supplemental Payments Should be Made Whenever Possible
Among the most effective strategies that can be used to reduce the time it takes to pay the car loan is the extra payment. Each time you pay a little extra, a larger portion of your money goes toward the principal, which reduces the total interest you will be charged.
Tips for Making Extra Payments:
Round up your payments:
For instance, if the required monthly payment is $275, it would not be a bad idea to pay $300 instead. These small extra amounts will accumulate over time, and therefore it is advisable to do away with them.
Make biweekly payments:
Instead of paying it once a month, spread it over two weeks in a month so that you pay half of the amount in the first two weeks and the other half in the last two weeks. This way you will make 26 half-payments per year, which will be one more payment per year.
Use bonuses or tax refunds:
Make any extra cash that you receive, including bonuses or refunds, go toward the principal balance of your loan. This is true even when it comes to a small lump sum which can make a lot of difference.
- Pay More Than the Minimum Monthly Payment
When you only pay the minimum required amount each month, a significant portion of your payment goes toward interest. By paying more than the minimum, you can reduce the principal balance more quickly and cut down the interest you’ll owe over time.
Benefits of Paying More:
Reduce overall interest:
Since interest is calculated based on the principal amount, the more you reduce your principal, the less interest you’ll accumulate.
Shorten the loan term:
By consistently paying more than the minimum, you can shorten the life of your loan without needing to refinance or adjust your loan terms.
- Refinance Your Auto Loan
Refinancing your auto loan is another effective way to save money and pay off your loan faster. When you refinance, you may qualify for a lower interest rate, which can significantly reduce the amount of interest you’ll pay over the life of the loan.
When to Consider Refinancing:
Interest rates have dropped:
If interest rates have fallen since you took out your loan, refinancing could lower your rate and save you money.
Your credit score has improved:
If your credit score has increased since you originally financed your car, you may qualify for better terms and a lower interest rate.
Your financial situation has changed:
If you’re now able to afford higher monthly payments, refinancing for a shorter loan term can help you pay off the loan faster and save on interest.
Refinancing with Automatic Car Credit:
At Automatic Car Credit, we offer refinancing options designed to help you reduce your loan term and secure a lower interest rate. Speak to one of our loan specialists to see if refinancing is right for you.
- Avoid Extending Your Loan Term
While extending your loan term might lower your monthly payments, it will also increase the amount of interest you pay over the life of the loan. If your goal is to pay off your car loan faster, avoid extending the term and, if possible, opt for a shorter term when refinancing or setting up your loan.
Why a Shorter Loan Term is Better:
Less interest paid:
A shorter loan term means fewer payments overall, which reduces the amount of interest you’ll pay.
Faster ownership:
Paying off your loan sooner means you’ll own the car outright faster and be free from monthly payments.
- Automate Your Payments
Automating your payments can ensure that you never miss a due date, helping you avoid late fees and additional interest charges. Many lenders, including Automatic Car Credit, offer an auto-pay option, which can simplify the repayment process.
Benefits of Automated Payments:
Consistency:
Regular, on-time payments can help you stay on track and may even help improve your credit score.
Possible interest rate reduction:
Some lenders offer an interest rate discount for customers who enroll in auto-pay, saving you even more money in the long run.
- Avoid Prepayment Penalties
Therefore, if you are interested in making extra payments or paying off your loan early, you need to find out if your loan contract contains prepayment penalties. Some of the lenders will charge a fee for early payment of the loan and this will mean that the benefits of paying off the loan early will not be realized.
How to Avoid Prepayment Penalties:
Check your loan agreement:
You should go through the conditions of the loan you are taking to determine whether or not there are penalty charges for early payment.
Choose a lender without penalties:
Most of the loans that we offer at Automatic Car Credit do not attract penalties in case you decide to pay your loan earlier than agreed.
- Use Windfalls and Bonuses to Pay
Another way one can use to pay off the car loan earlier is to use any extra cash that one may receive from time to time like bonuses, tax returns or cash gifts. Such payments can help you make a major dent in your principal and also decrease the time it takes to repay the loan.
How to Use Windfalls Effectively:
Apply the full amount:
In case you receive a work bonus or a tax refund, one should pay the whole amount to the loan without any interest.
Make lump-sum payments:
Any additional payment in lump-sum form can also be significant, much more if made during the early period of the loan when the principal is greater.
- Car loans are useful and you should use a car loan calculator.
It is also possible to find a car loan calculator that will show how various payment plans will impact the loan. Through entering different additional payments or shorter loan terms, you can determine the time and money you will be able to save.
Bottom Line
Therefore, to pay off your car loan early, does not have to be a complicated affair. When it comes to car loans, it is possible to lower the interest and own the car faster through additional payments, refinancing, and no prepayment penalties. Here at Automatic Car Credit, we are with you every step of the way and we provide you with the right loan packages to enable you to achieve your financial objectives in the soonest time possible.