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4 minutes read. Published 17 August 2022
Authored by Kellye Guinan Written by Personal and Business Finance contributor
Kellye Guinan is a freelance editor and writer with more than 5 years experience working in the field of personal finance. She is also a full-time librarian at the local library, where she assists her community access information about financial literacy, among other topics.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain confidence to control their finances with precise, well-researched and well-written facts that break down otherwise complex topics into manageable bites.
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Provided your lender does not have a penalty for prepayment and you pay off your loan faster, it is a great way to save money. It means less interest paid and, once you’re finished, you’ll have a few hundred dollars to spend every month. But getting there may be difficult. There are several strategies that you can employ to pay off your loan off quicker. Even the best option however, it can cause you to be in a more dire financial position if you aren’t aware of your strategy. 6 ways to get rid of your car loan quicker There’s no one path to paying the car loan ahead of schedule. It makes sense to vary your approach. Once you have an idea of what you want to do, you are able to make use of a couple of methods to get rid of your car loan more quickly. 1. Refinancing your loan with a different lender could be a simple option to pay off your loan more quickly. If you choose a shorter loan duration, you might be able to maintain the same monthly payments — if you can secure lower interest rates. Even if you don’t make additional payments or round up your payments in the first place, you’ll finish your car loan quicker. 2. Set up biweekly payments. Although it may seem like a lot, paying twice a month rather than just once will get you closer to the finish line. It also helps to save money on . The reason is that interest will be less likely to accumulate before making a payment — and because you’ll always lower your overall loan balance. It helps move you toward the date of your early payment without drastically increasing the amount that you put toward your loan each month. 3. Round your payments up to the nearest 100. Similar to this in rounding up your monthly payments, it will result in a minor change month-to-month but a substantial change over the long run. By rounding to the nearest hundred or, at a minimum, the closest whole number, you will slowly reduce the principal of your car loan. You will also get ahead of your schedule, which will keep you ahead of interest rates and make it easier to get a quicker payoff. 4. Avoid unnecessary add-ons If you like gaps insurance or an extended warranty, or a service contract to your loan make contact with your provider and cancel the add-ons. You should receive a prorated refund for the remaining amount, while also lowering your monthly payments. However, instead of putting that money in your account, apply it to the loan. So, you’ll owe less overall and benefit from the lump sum. 5. Make a large additional payment Tax returns, bonuses and other big lumps of money could go towards your vehicle loan. If you can cut the amount of your principal by a couple of thousand dollars is likely worth it. Similar to rounding your monthly payments and making biweekly payments, it will prevent interest from adding up. As your loan balance decreases and your monthly payment increases, more will go toward principal, leading to the payment being made early. 6. Make sure you pay each month, even you’re ahead of your schedule and you are ahead of schedule, you must still pay your loan every month. This will keep interest from accruing — which means more of your principal is paid which will reduce the cost of interest. Making regular payments even in the absence of a need can result in paying the car loan in a timely manner. If you don’t want to make a payment on your car loan early The ability to pay off your car loan early means an extra couple hundred dollars in your pocket each month. But in some cases it could harm your financial position more than you help and so not be the ideal move. Beware of paying your loan early if: There is a penalty for early payment. The penalty is basically a way to punish you for not making enough payments or paying the full amount of your loan in advance. The lender is trying to compensate with the amount of interest that you could have incurred when you had adhered to the schedule. If there’s a prepayment penalty, make sure it won’t cost you more than you would otherwise have to pay in interest. Your loan makes use of pre-calculated interest . front-loads the interest you pay every year, so you pay for the month that is accounted for a larger portion than the final month. If you’re able to pay off your loan early, you aren’t going to substantially reduce the cost of your auto loan. In this scenario it’s better to adhere to the loan timetable. There isn’t a lot of debt. While it may seem counterintuitive, your credit score is calculated based on the types of debt you’ve accumulated and the duration of the debts. Because automobile loans are long-term debts that require regular payments over years can help keep your credit score high. A caveat is that paying off your loan may lower your credit utilization ratio, which represents about 30 percent of your credit score. If you have debts that aren’t paid off and high debt-to-income ratio (DTI), then removing one debt will help boost your score. Strategies to reduce the cost of your car loan refinancing your loan and renegotiating your loan, there are two methods to cut down your monthly payments either defer them or ask for an loan modification. Deferment allows you to skip a payment if you are experiencing short-term financial hardship. Lenders may offer one to three months deferment to ease your burden. But deferment only moves the payments to the finalization of your loan, so you will still have to make them up eventually. Additionally, you will be accountable for interest and at the end it’s more costly. The lenders may not be as willing to alter your loan however it wouldn’t hurt to ask. Much like refinancing, will modify the conditions of your loan by either extending your duration or lowering your rate. If you can get a modification to your loan, you could reduce your monthly payment without the need to find an entirely new lender. Next steps It may not always be the most beneficial option to pay off your car loan early. If you’re facing penalties for prepayment or a possible hit to your credit score, the savings aren’t worth it. However, if you’re trying to eliminate debt, eliminating car payments is among the most efficient methods to free up your budget. Refinancing — or just making additional payments is the most effective way to pay off your car loan faster. Even if it’s just one extra dollar a month, you’ll be able to reduce your debt and may cut a few months out of your loan. Learn more
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Written by Business and personal finance contributor
Kellye Guinan is a freelance editor and writer with over five years ‘ experience within personal finances. She is also a full-time worker at her local library where she helps her community get information about financial literacy, in addition to other topics.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing precise, well-researched and informative facts that break down complicated topics into bite-sized pieces.
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