Approximately seventy percent of people borrow money when they have to buy a car. Unfortunately, a car loan is indeed one of the most significant financial obligations that you can have. A car loan can easily take about sixty to seventy-two months to pay off, that is, five to six years. This also adds up to a lot of interest.
If you want to get out of that financial obligation quickly and save that interest amount, here, in this guide, we will address six valuable ways to help you pay off your car loan early.
- Automate higher monthly payouts
Automating good financial behavior and habits is indeed a good idea. You can pay off your car loan early by opting for a high automated payout. Let us understand this with an example. Your regular monthly payout is $400. However, you can set your automated payment to $500 (or anything >$400) that will help you knock out your loan faster. This additional money is a payout of the principal balance. Consequently, it moves you toward the amortization schedule. Therefore, you can eliminate the high-interest rate phase of your term.
- Make bi-weekly payments
Typically, you make monthly payments toward the loan amount. Instead of this, you can consider submitting half payouts once every two weeks. There is a two-fold benefit to this approach. Since the payouts will be applied more frequently, there is lesser interest accrued. Also, you will be making twenty-six payouts in a year. It implies that you will make one full extra payment in a 12-month cycle. If you repeat this every year till the term of your loan, you would have shortened the term of your loan by several months or years. For instance, if your mortgage term is 30 years, by this strategy, you can reduce it to only twenty-six years.
- Refinance the loan for a lower interest rate
If your financial circumstances, income, or credit score have improved from the vehicle loan’s original time, you can consider refinancing your loan for a reduced interest rate. However, you must opt for a shorter loan term than your original to allow you to pay off faster, especially if you intend to pay additional principal each month.
- Make snowball debt payments
This method applies to all forms of debt, including car loans. So, for this, firstly, take the loan that has the least balance. Now, allocate the surplus from your budget to this. Next, take the money paid toward this debt and allocate it to the debt with the least balance. After that has been cleared, you can employ the whole amount you were paying for your next debt till you have cleared the whole of your debt amount. Snowball debt payments are beneficial. Usually, people like to go with the highest interest debts over the lower balances. Whichever method you choose, it will work great to clear your debt earlier. Of course, this applies if you do not add any additional debt while trying to pay off your existing debt.
- Increase your income
If you cannot stretch any further with your existing paycheck, you can indulge in a side hustle and employ your income from it toward your vehicle loan. It can be a good idea because only a few hours extra in a week toward your part-time job can result in extra cash, which can be a significant dent in the amount that you owe. This is a preferable option for anyone who can squeeze in some spare time in their schedule for freelance work, a part-time job, a side gig, or any temp work.
Instead of paying the due loan repayment amount, you can round up your payment amount to the nearest $50. This can accelerate the repayment process. Let us understand this with an example. Suppose you borrowed $10,000 at an interest of 10 percent for five years. This would account for your monthly payout to $212.47. So, if you pay this amount routinely every month, you will be free from debt in five years. However, in this case, you will be bearing an additional interest amount of $2748.23. What would the situation be like if you decided to round up your repayment amount of $212.47 to $250 monthly? In this case, you will be free from your car loan in only 47 months. This also means that you will pay just $2214.69 as an interest amount. Consequently, you will end up saving $533.54.