4 Tricks to Help Pay Off Your Car Loan Ahead of Schedule

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Car Loan

A National Problem

All told, American drivers now collectively owe more than a trillion dollars on their auto loans. Outstanding debt surpassed the trillion mark in 2015 or 2016, depending which news source you examine. To put that in perspective, Bill Gates, world’s richest person, is worth a paltry 86 billion. If you stacked a trillion dollars in hundred dollar bills on top of each other, they would reach 631 miles into space. That is two and a half times the distance from here to the International Space Station.

Interest rates on all those loans are not much more hopeful. They can range from 8.35% for those with excellent credit, up to over 21% for those with poor credit. Typically, the higher your credit, the higher loan amount you will agree to. Auto debt isn’t helpful debt, either, like a house note. The value of a house can grow over time. Cars, on the other hand, begin to lose value the minute they leave the lot. To creditors, car loan debt is just as negative as credit card debt.

What You Can Do

Looking at these statistics, you may conclude that getting a car loan is a terrible idea or that paying one off will take longer than the life of the car. Like most stressful situations, though, there are things you can do to ease your burden. You can’t chip away at the trillion dollars much, but you can do a few things to make your own obligations to debtors a little less anxiety-inducing.

One way is to pay the car loan off early. Doing this saves you money, because you can attack the interest instead of just the principal. Most car loans, like house loans, are designed so that your monthly payment goes towards the principal first.

Paying off your car loan early will also improve your credit score and credit rating. Here are four hacks we rounded up to get you thinking and planning towards an early payoff of your auto loan.

More Than The Bare Minimum

The first and simplest way to pay off a car loan early is to pay an amount over the required payment each month.

Just rounding numbers is a good way to approach this, too. If your loan is $273 a month, you could start paying $300 instead. That’s $27 a month going towards interest on top of the $273 going towards mostly principal. $27 a month is $324 a year. It may not sound like much, but it adds up.

To make this work, you may have to look at your budget and see where you can cut back or go without a luxury item to make sure you have the extra money each month. If you make enough money to drive and maintain a decent car, you can probably skip dinner out or an extra clothing item once or twice a month. It is a small sacrifice to make, one that will get you to a better outcome in the long run.

Flip The Payment Schedule

There’s no rule stating you have to pay the car note on the exact day the bank asks for it. Just like a utility bill, the money will be credited to your account even if you send it two weeks or more early. Our next trick is just that simple–pay your car note twice a month, sending half the payment each time.

What does this accomplish? It’s not as dramatic as paying more than the minimum, but it has an impact. Since there are 52 weeks in a year, you will make a total of 26 biweekly payments. That’s 12 monthly payments, plus two more half payments which amount to an extra payment each year. This is a good option if you do not have the money up front to round up each single payment, as you would in the first hack.

Tax Refunds and Birthdays

If you make less than a certain amount of money–chances are you wouldn’t be reading this article if you didn’t–you know you are eligible for a tax refund each year.

It’s tempting to either treat yourself with the money, or plan something big all year, like a vacation. But what if you took all or part of the refund and applied it in a lump sum to your car loan? If it were a thousand dollars, that would be a thousand dollars of interest that you could eliminate. It’s arguably a wiser move than putting the money in savings. Savings are vital, but they won’t help your credit rating as much as reducing your debt to credit ratio will.

If you receive gifts of cash for your birthday or holidays like Christmas, that is money you did not budget for. The same goes with an infrequent side hustle, like selling used clothing online. If you can resist the urge to spend, and stay within your budgeted limits, you can use these gifts to get yourself out of debt faster.

Find Out About Refinancing

If you qualify, you can take out a second loan to pay off the first loan. It sounds risky, and it can be, but refinancing will also let you pay down the interest faster. This trick will only work if the terms of the new loan are better for you than the old terms. An example would be if you get a lower interest rate.

Know What You Are Getting Into

If you are already locked in to a loan, and you find the payments overwhelming, this last thought may not help much. But the best way to avoid complications is to not sign up for them in the first place. It’s like breaking in a a pair of shoes–there are things you can do, but if you bought the shoes too big or too small to start, the problem will be a lot harder to remedy. So this doesn’t really qualify as a trick or hack for paying off the loan early.

However, what’s in the fine print may affect your early payment efforts, and not in a good way. There may be a penalty for early payment. You would actually have to pay more money if you wanted to pay early. If you can pay a large lump sum, that may help.

Otherwise, if there is a penalty, there isn’t much you can do unless you qualify to refinance. For this reason, it is vital to look at an entire loan agreement before you sign. Look for the words “prepayment penalty” in the loan paperwork. If there is a penalty, it could be that you still save money with early repayment. You just have to subtract the amount of the penalty from the amount you initially thought you’d save.