The average American owes upwards of $20,000 in auto debt. Therefore, it’s little wonder that more and more people are looking for simple strategies to pay off their loans quicker and to enjoy fully owning their car. Read this article to learn our best practices for paying off your auto loan faster to increase your financial well-being.
How To Pay off a Car Loan Faster
The first step to paying off a car loan ahead of schedule is to find the remaining balance. The easiest way to find the total is to contact the lienholder and ask them directly. Ask about any penalties included for closing out the loan early. The next step is to formulate a plan for paying the balance early. Borrowers can pay the balance as a lump sum or add a little extra to their monthly payment. Either way, they’ll reduce the loan amount and close it ahead of schedule.
Why Is It Important To Pay Off Car Debt Fast?
The average borrower saves money and improves their financial well-being by paying off their loan sooner. While it’s true that the borrower is responsible for the loan balance no matter what, the longer the loan is open, the more interest it accrues. Closing the account sooner reduces the time they’ll have to pay interest.
Paying the loan off sooner also means that the borrower will take ownership of the vehicle sooner. Once they have the title, they’ll be able to sell the vehicle easier. They’ll also be able to save money on their car insurance since the lender’s rules won’t apply anymore.
There’s also no risk of being upside-down on a car once it’s paid in full. Being upside down on a car or owning more than the vehicle is worth happens when the car depreciates faster than it’s being paid off. The average car depreciates as much as 20% in its first year. This means that people who pay a smaller down payment and opt for longer loan repayment plans could face this issue if they have an accident or need to sell before their loan balances out.
Should You Pay Off Your Loan Early?
Borrowers should only consider paying off their loan early if it would be favorable for them to do so. If they want to be debt free, if they get a raise at work, or if their loan has a high interest rate, paying it early would be an excellent financial move.
Determine Your Current Balance and Payoff Penalties
The best way to determine your payoff balance and check for penalties is to contact your lienholder directly. They’ll be able to give you information about the final balance and where to submit the payment.
Calculate How Much You’ll Save
The average car payment rose to $733 in July 2022. Paying even $100 extra per month could decrease the life of your loan by 16 months, putting that $733 back into your pocket sooner. You’ll also be saving 16 months’ worth of interest payments by paying your loan off early.
Consider How Paying off a Car Loan Early Affects Your Credit
Paying off a loan can affect your credit score. While reducing your debt positively impacts your credit, closing the account initially can cause your score to dip slightly. If you’re trying to qualify for a new home or another large purchase, you may want to hold off on paying off the car.
When You May Not Want To Pay Off Your Car Loan Early
People with auto loans should hold off on repaying the loan if they have other debt with higher interest, or it would be a struggle to find the extra cash to pay it off. Loan repayment can also come with repayment penalties for additional fees required to close the account.
Tips for Paying off a Car Loan Early
The biggest tip is to stay on top of the monthly payments, even if you’re ahead of schedule. The sooner the borrower can pay off the loan, the less money they’ll have to pay in interest, and the sooner their monthly payment will be available to them again.
There are several ways to approach paying a loan back early. The borrower could refinance the vehicle or make bi-monthly payments instead of just one. They could also pay extra per month or review any add-ons to reduce the loan balance. Applying a lump sum from a raise or a tax return is always an option, as is picking up extra shifts at work or finding a side hustle to help make additional payments.
Consider Refinancing Your Current Car Loan
A loan officer may be able to offer a lower interest rate and fewer payments for the car loan. Paying less interest but more toward the principal will put the borrower on track to repay the loan faster.
Make Biweekly Payments
The standard auto loan requires one payment per month. Paying half the total loan amount every two weeks makes 26 payments towards their loan instead of the usual twelve. If they stick to this schedule, the borrower will make an extra monthly payment towards their loan.
Round up Your Car Loan Payments.
Any extra payment towards a loan goes straight to the principal, which reduces the overall balance of the loan. Rounding your payment up to the nearest $20, $50, or $100 will drop your overall balance much faster than paying the minimum every month.
Review Add-ons and Additional Car Expenses
Finance companies will sometimes roll additions like gap coverage and warranties into the price of the loan. They add additional coverage, but they also add extra expenses. The financier may require some of these coverages.
The borrower can lower their monthly payment and receive a partial refund by removing the unnecessary coverages from the loan. If the borrower continues to pay the higher payment, they’ll be able to pay off their loan sooner than expected.
Make a Large Payment
When a borrower comes into a large sum of money, like a tax refund or a bonus from work, they can put the money towards their loan for faster repayment. Not only will the large sum reduce the balance of the loan, but it will also reduce the amount of interest added to the loan balance in the future.
Find Extra Money
Picking up overtime hours at work can make a big difference in repaying a loan as quickly as possible. Finding a second job with flexible hours or signing up for gig work means you can make extra money when it works best with your schedule.
What Happens When You Pay Off Your Car?
Once the driver pays off the loan, they’ll officially own their vehicle. Many states are title-holding states. This means that the lienholder keeps the title until the loan has been satisfied. Once the driver pays off the car, the insurance company can remove the lienholder from the title. They’ll also notify the Department of Motor Vehicles that the title is changing hands. Then the financier will send the title to the driver.
You’ll also need to notify the insurance company that you’ve paid off the vehicle. If the finance company is still listed as the lienholder, any payment from an accident could go to them instead of you.
You can also take this time to review your insurance level and make sure you’re still comfortable with the coverages. Most lenders require a certain level of coverage while they hold the title to the vehicle. Once you’ve paid off your car, those requirements no longer apply. Remember, though, that any coverage you drop will no longer apply to your vehicle. You risk having to pay for those repairs out of pocket.