How to Pay Off a Car Loan Faster: The Best Tips and Tricks
Financing a vehicle is necessary for most people.
The average new car price in Canada was $33,464 as of 2017. Not a lot of people have that much free cash lying around to purchase a new vehicle outright.
A growing trend is taking out longer car loans, sometimes up to 7 years compared to the traditional 5 years. Over half of new Canadian car loans are for 7 years.
No matter how much or how long your financing is, you may wonder how to pay off a car loan faster.
Getting rid of that debt faster than planned cuts down on how much interest you pay. It also frees up more money in your budget to go toward other things.
We gathered the best tips and tricks to help you pay off your car loan faster.
Make Smart Loan Decisions
If you haven’t taken out a loan yet, certain choices in the financing process help you pay off the debt faster.
The obvious way to get rid of your car loan faster is to take out the loan for the shortest length of time possible. It’s tempting to take a longer loan because your monthly payments are lower. But you pay a lot more in interest with the longer loan.
If you have money for a down payment, use it when you purchase. This allows you to take out a smaller loan, which you can pay off faster. You’ll also pay less interest since you’re borrowing less money.
Negotiate with the salesperson to get the lowest cost possible for the vehicle. Again, you’re borrowing less and paying less interest on the smaller amount. You may also be able to pay back the smaller loan faster.
Look at Prepayment Penalties
Read the fine print of your auto loan to check for prepayment penalties.
Some lenders work those penalties into the agreement to make it difficult for you to pay off your loan early.
Why? Because they miss out on lots of interest if you speed up your loan repayment process.
Verify that your loan doesn’t have a prepayment penalty before you put extra money toward it.
If you already have an auto loan, look at the interest rate. Compare that to current auto loan rates.
If the current rates are significantly lower, refinancing your loan may be a smart idea.
You may also be able to get a better interest rate if you had poor credit when you got the loan but have improved it since.
When you refinance, you’ll still owe the same amount, but you’ll have smaller interest payments. Your monthly payments will likely be lower because of that.
Continue paying the higher amount you’ve been paying. You’re already used to paying that much per month. The extra money helps cut down what you owe faster.
Consider the fees and costs for refinancing compared to how much you can save before you refinance.
Add to Your Monthly Payment
The easiest way to pay your loan faster is simply by paying more each month. Think of it as paying ahead.
This has the most impact when you put the money toward the loan principal. That’s the original amount you financed.
Interest is calculated based on the principal. If you pay the principal faster, your interest amount decreases.
But not all lenders apply your extra money toward the principal. They may apply it toward your next payment, which includes interest.
Specify that you want the money to go toward the principal when you make a larger payment. Some lenders make this easier than others to do.
Apply Lump Sums to Your Loan
Did you get a big Christmas bonus or a fat tax return this year? Instead of spending that on fun purchases, put it toward your car loan.
Even smaller amounts, such as birthday or holiday gift money, can make a difference.
Those chunks of money are extra, so they’re not part of your planned budget. You don’t need those amounts to cover your normal expenses.
Instead of keeping the in your bank account where you might spend them on things you don’t need, apply them to your auto loan immediately.
Earn Extra Money
If you’re really focused on paying off your car loan early, it might be worth it to put in a little extra work temporarily to go toward the loan.
One option is to get a second job. Put everything you earn from that job toward your car loan. Since you’re not used to having that paycheck for expenses, you can put it toward your loan without missing anything.
If you don’t want the commitment of a regular part-time job, consider freelancing or doing odd jobs. You might mow yards or scoop snow for neighbours.
Perhaps you have a certain skill, such as writing, computer programming, or web design. Offering those services on a freelance basis earns you extra income that can go toward the loan.
Another popular option is selling items for extra cash. Start with the things already in your home that you don’t use.
You can also look for free items on the side of the road that you can fix up and sell. Maybe a neighbour has an old chair on the curb for free that you can easily fix up and sell.
Put the profits from anything you sell directly toward your car loan to pay it off sooner.
Cut Expenses to Find Extra Money
If your budget is tight, find ways to cut your expenses to free up money that can go toward your auto loan.
When you find a way to lower a fixed expense, apply that same amount to your car loan payment each month.
Say you show around for new car insurance and find an option that saves you $50 per month. Put that $50 toward your loan payment for a faster payoff.
If you lower your cable bill by $20, put that toward your loan.
Perhaps you cut memberships completely to the gym, subscription boxes, or other monthly membership services. Put those monthly fees toward your loan.
How to Pay Off a Car Loan Faster
Figuring out how to pay off a car loan faster depends largely on your financial situation. Finding extra money to put toward the loan can help you eliminate that debt faster.
If you’re in the market for a new car, check out our specials to help you find the best deal possible.