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If you’re like many people, you may wonder, “how to pay off a car loan early?” Fortunately, you have options if you know what you are doing and take action. This can save you money in interest and give you a large chunk of money each month for something other than paying off your car loan.
Paying off your car loan early can be helpful. Some benefits include:
Although paying off your car loan early can help in some ways, it does come with potential drawbacks. Some drawbacks include:
Here are some ideas to consider on how to pay off a car loan early.
Interest eats away at your monthly car payment, becoming more costly and harder to pay off. Do your homework on interest rates for your particular type of loan. Look at how much the average borrower is paying, and consider how much you would owe if you paid the full interest rate.
When you refinance, you have the option to get a lower, fixed-rate or adjust your payments. If you think there is a big gap between your current interest rate and what’s available, you could refinance. If you are buying a new or used car, try to get as low of an interest rate as possible to reduce the total interest you pay. This will help you pay off the loan earlier.
When you make payments, put your best efforts toward paying off the balance in full as soon as possible. Make any extra payments to the principal as you have access to additional money. Don’t simply send in extra money.
Be sure that extra funds go toward paying off your car loan’s principal instead of the interest. These additional funds could come from tax refunds, birthday money, work bonuses, and money you get from decluttering and selling unwanted items.
Understanding your monthly expenses and income is the key to understanding when to start paying off your loan early. Once you know how much you can afford to pay each month toward the balance, calculate how many payments you want to make each month.
If your monthly budget is already tight, create a spending plan to avoid putting unnecessary items on credit. This way, you can put more money toward your car loan. You can reduce certain expenses, such as dining out, by simply eating at home. Consider shopping at discount grocery stores, such as Aldi and Save a Lot, to direct some of your grocery budget toward your car loan payment.
Many people get themselves into trouble when they spend more than they make. This might mean that your car is more expensive than you can realistically afford. If the payments become too much to handle and start hurting your finances in other areas, it may be better to sell the car and find something more affordable.
If you keep paying it off without stopping to think, you will always be in debt. Here, the only way you will get out of it is to change more about your monthly budget. Getting out from under a car loan that’s too expensive for your financial situation can make it much easier to fix your financial problems and get back to a better place.
Another way to pay off a car loan is to use your home equity. Sometimes, you can get a lower interest rate from your home, which will save you money in the long run. But first, do some research and speak to an adviser about your specific needs and goals.
If you are in dire circumstances and risk losing your car because you can’t afford the payments, consider selling it and taking out a short-term loan with a local lender. This will reduce your payments to zero, freeing up money for other financial problems.
In most cases, the car will be worth less than what you owe, plus the interest and fees. This means you’ll likely need a smaller short-term loan to cover the difference once you sell the vehicle and put that money toward the car loan. Using one loan to pay off another can seem strange, but the short-term loan will have better conditions that can help you through financial problems. A local bank or credit union may even help you finance the loan.
You can sell the car yourself and pay the profits toward the loan. However, this is a risky way to do so, as you end up losing the vehicle. It’s not likely that the buyer will give you as much as you’re asking for, either.
You should reserve this option as an absolute last resort. Before taking such drastic actions, try budgeting and discussing your specific financial needs with an advisor to feel confident in your decision.
Your car loan provider may help you find ways on how to pay off a car loan early. They will know which options are open to you and what the interest rates and minimum payments could be. Also, they can tell you how much time you have to pay off your loan since they keep track of the payments.
There could be incentives for automatic bill pay or paying your loan online to lower the amount you have to pay. If this is the case, you can put more money each month toward the principal balance of your car loan.
Paying off a car loan early can save you money each month. If you have a large balance on your monthly payments, you will no longer be paying the interest or fees associated with your account. Instead, you make only the necessary payments — a significantly smaller portion of what you pay in interest.
These strategies can help with how to pay off a car loan early, making it easier to achieve financial security. As you gain more financial security, you become free from the stress associated with having debt.