In today’s world, you need a car to get from point A to point B. Point A is most likely your house and point B is most likely your workplace. It is difficult to live without on-demand transportation if you live in the suburbs or if you have children. And guess what? Cars are expensive. Maybe you saved up for a down payment but couldn’t quite make the money work – you had to finance a portion of your car’s price. You aren’t alone. Many Americans find themselves in the same boat – paying a car loan every month and wishing it would disappear. Here’s the thing – you can make that car loan disappear. Paying off your car loan early IS possible.
Before we begin discussing the main six steps towards fast car loan payoff, let’s explore some of the reasons behind this decision. As with any financial goal, you should have sound reasoning to back up your efforts. It can help you remember why the end goal is worth it when you feel discouraged or let down about your seemingly slow progress.
Why Pay Off Your Car Loan Ahead of Schedule?
The main reason to pay off any loan early, including your car loan, is to avoid the thousands of dollars in interest you would have to pay over the course of your loan. However, car loans are usually not as pricey in interest terms as other loans, such as credit card balances or student loans. If you are going to put all of your extra efforts towards paying off your car loan, make sure you don’t have any other outstanding debts with a higher interest rate than your car loan. When you are trying to clear away debt, you should always
tackle the loan with the highest interest rate first – you will end up paying the least amount of interest when you take that route.
The second reason to consider paying off your car loan early is to free up your monthly income for more important matters. For example, you will have more money to invest in retirement. You will have more money to cope with sudden emergencies. You will have more cash to enjoy and your quality of life will go up.
You want another reason for paying off a car loan? It helps your credit. Having a completely on-time, paid-off loan entry on your credit report signals to lenders that you are reliable, responsible and you will be approved for the lowest interest rates possible for other major loans like a mortgage. Why not make your credit profile as attractive as possible to a potential lender? Paying off your car loan is a great step in that direction.
Finally, you can experience other budget benefits by paying off your car loan. Your auto insurance policy is automatically higher when you have a lien out on the vehicle. When you pay off the loan, you can talk to your insurance company and ask them to reassess your payment. You will have a much lower premium on all aspects of the policy, including comprehensive and collision coverage. So you will free up the space in your budget normally reserved for your car loan and then some, once you factor in the discount from your auto insurance.
Now that you’ve decided to pay off your car loan, it is time to make a plan as to how to go about your project. While you may not see a drastic change overnight, you can definitely make daily progress in your goals when you follow these six steps towards success.
Talk to Your Lender About Potential Penalties
The first thing to make sure of is that you will not be charged any additional fees for paying off your car loan ahead of schedule. It depends on the lender and the contract you signed when the loan was issued, but some loans may charge you for the lost interest they would have otherwise gained if you had stuck to the original schedule, or a fee that is at least a portion of the total amount. This would not be a nice surprise – getting your account charged for extra interest regardless of your payoff efforts. You would probably feel discouraged and it might even make you stop your extra payments on the loan.
Hopefully your lender will not charge you for pursuing this goal, but if they state that they will, you can try to refinance your car loan with a different organization that does not have the same policy before paying off the loan faster than expected.
Revise Your Payment Schedule
Sure, your lender might only require one monthly payment on a set day every month, but what do YOU require from yourself? You can “trick” yourself into paying more by changing your payment schedule – instead of waiting until the due date, submit a weekly payment to your car loan. Let’s say you owe $350 per month on your car loan. That is $87.50 per week. You can round this number up and simply pay $100 per week. You end up paying $50 extra per month, and an extra $400 per year, since there are 52 weeks total. It can be pretty easy to get into the habit of paying weekly or even bi-monthly. As soon as you receive every paycheck, send off $200 to your car loan lender. If you figure it into your budget, you will get used to paying the money and won’t feel like you’re stretching yourself to make those payments.
Since you will be paying cash on the loan more frequently, you will also have less interest build up on the account. This will save you money as well as time goes along.
Consider Refinancing as an Option
There are many cases where refinancing a car loan can seriously help you on your journey to paying off a car loan completely. If you had bad credit when you originally applied for your car loan, maybe you were stuck with a high interest rate based on your current finances, but it does not fully describe you at this time. You have worked hard to improve your credit and you would like to rework your loan to reflect that. Even if you can save about 1% over the course of the loan on interest, that mostly negates any fees and charges resulting from the refinancing process.
Refinancing may also be the best option if you have had a car for a number of years. Interest rates have dropped significantly when it comes to both new and used cars. In many cases, you can submit a refinancing request online and hear an answer in a matter of hours. Make sure you do the math and make sure you are coming out positively after any fees or charges from the original lender. It’s a good start to visit your local credit unions as well. They may offer you the best options in terms of car loan refinancing interest rates. One thing to watch for: some refinancing options only accept your car if you owe a certain amount on the balance. Car loans with too small or too large of a balance may not qualify.
Don’t Settle for Paying the Minimum
It’s time to really assess your current budget. What can you cut and what can you save? All of those little luxuries that you splurge on? Those funds can make serious progress towards your car loan balance. No, it might not seem like your weekly coffee splurge will add up, but it does. Try to cut coupons to reduce your grocery bill. Try to switch cell phone carriers to lower your monthly payment. Try to adjust your cable bill
or cut it out altogether and depend on cheaper entertainment subscriptions.
Any time you come into extra money, put it on your car loan. Take your tax refund, work bonuses and any other surplus you may come across and add that to the total as well. You can shave many years off your loan when you do so. Think about it – you could spend the money on a vacation or on items you may want to buy, but you’ll have to come back to reality at some point and continue paying your car loan. If you eliminate your car loan, you can start living better EVERY day, instead of just once in a while.
Automate Extra Payments or Use Paperless Statements
Talk to your lender. There are real people on the other end of the phone who want to work with you. As a whole, the bank or lending institution values you as a client as well. Ask about any rewards they may offer. In some cases, they may give you a monthly percentage discount on your loan if you schedule your payments to come out of your checking account automatically each month. This gives the lender more security that the loan will be paid on time, and they are usually more than willing to reward that assurance.
Also, if you switch to paperless online statements, they may give you a one-time or continuous discount as well. You will be doing the environment a favor and saving your bank on postage costs. Why not have that discount go towards your loan balance as well?
Sometimes the biggest enemy to success is yourself – maybe you forget to make regular or extra payments on time. With modern technology, you can get around this bump. Set bill pay reminders on your phone or computer. Look at your overall budget on a weekly basis. Get into the habit of assessing your spending,
seeing how you can improve, and paying that extra money on your car loan at the end of the week or month, whichever works for you.
Keep Your Eyes on the End Goal
The hardest part of paying off a car loan is that the final goal is not something you can physically see, but it still majorly effects your life. Buying a new pair of clothes or shoes? You can look at them, touch them and enjoy them to a degree. You might feel more instant satisfaction, but you don’t feel the long-lasting satisfaction of freedom from debt. In your dark days, try to focus on how that is going to feel – no monthly payments to a creditor. The freedom to fully enjoy each cent you make. The ability to make great strides towards your future.
In order to stay this focused throughout the months or years it may take to finish off your car loan, set goals for yourself. Once you’ve paid off another $1,000 from the balance – celebrate! Once you only have $5,000 left to go – congratulate yourself! Feel free to enjoy each milestone along the journey. Reaching a zero balance might be the final goal, but the steps you take in the meantime mean a lot for your finances as well.
You can also try to partner with a friend who is working towards the same goal. You can talk to each other about your progress and share different ideas on how to maximize your money and time. It helps to have a partner in your efforts and you can encourage each other when the going gets rough.
Take action on these six steps when working towards paying off any car loan you might have. If you have two car loans, pay off the loan with the larger monthly payment first or the highest interest rate, then tackle the next one. Your hard work deserves a reward – don’t go to work every day to pay a lender all of your money. Take charge of your finances and start by paying off your car loan today.