Are you looking to get a car loan but worried about paying it off? If so we are here to give you some financial tips that will help you pay off your loan and save money in the long run.
By paying off your car loan early you will save on interest and free up money that can be put towards other bills. To see what our top tips are, keep reading below.
1. Figure Out Your Current Balance and Pay It
If you’ve already have taken out a loan for purchasing a car then you should determine what you currently owe on the car loan. After looking at the remaining balance you can then take the steps to figure out how to repay your loan faster.
By looking at the details of your loan you can see if the loan lenders make it easy or difficult to pay off your loan fast. Some loan lending businesses will make it hard to pay off loans early because they will receive less interest overall.
In the best case, your loan should have been calculated using simple interest. This means that your monthly bill is based upon the outstanding balance of your loan. From here you can decide what you can pay monthly (ideally more than what your current bill is) to pay the loan back faster and have less interest.
2. Keep the Prepayment Penalty in Mind
If the lender in which you took out your car loan does allow for early payoff then you should ask for some financial advice. You should be asking the loan company if they have prepayment penalties.
There are some lenders that will charge you a fee for paying your loan early. This could be the price of interest that the bank would get if you paid the loan in the time you took it out for. In this case, then there is no point in paying off the car loan early.
If you’re paying extra you should keep an eye on your statements and make sure that each payment is going towards the principal of the loan. There are some institutions that will put the overpay to interest or other fees instead of your principal. You can usually get by this by talking to the lender and specifying each payment as principal only.
3. Figure Out How Much You’ll Really Save
After looking at how much you owe to the car loan and if any penalties will apply to paying it off early, you should then figure out how much you’ll save in interest by paying the loan early. You can use a simple online calculator to do this.
Even if a small amount of savings is shown after paying the loan in full, there may be other things that will make it worth your while. An example is paying a loan in full and helping your credit score rise. You will also be freeing up some money in your monthly budget that can go towards other bills.
4. Refinancing Is an Option
If paying off your loan early isn’t in the stars then you can consider refinancing it. Refinancing can even be considered if there was high interest on your loan or if other monthly fees are too expensive.
Refinancing could help to give you better loan terms and even a smaller payment. If your credit score has risen since initially getting the loan then you should qualify for a lower bank rate which will save you money in the long run.
When looking at your refinancing options remember that your goal is to pay the loan off fast. Don’t go for a loan that’s longer than what your initial loan is.
5. Look for Methods to Pay Principal
If you have a simple-interest loan it can be paid off pretty fast by making additional or bigger payments monthly. This is because you’ll pay towards the principal, which will make the loan less, which leads to lower interest payments.
One method is to may payments every other week, or biweekly. If you change to this payment schedule you’ll be making an additional payment each year.
You can do this by dividing your car payment in half and then make this half payment biweekly. This means that you’ll be paying half of your payment 26 times every year. This then works out to be 13 payments in 12 months.
6. Round up Your Car Payments
A quick and easy way to increase your car payments is to round them up. We recommend rounding the payment up to the nearest 50 dollars. For example, if you borrowed a loan for 13,000 at 5 percent for 72 months then your payment will be around 209 dollars.
This means that you’ll be paying around 2,074 dollars in interest over the loan’s lifetime. If you round your payment up to 250 dollars then you will be paying your loan off 13 months earlier. This will then save you almost 400 dollars in interest.
7. Find Extra Money
A great way to pay off your loan faster is to find some extra money. This may sound hard but it’s easier than you may think.
You can first try to snowball your debt payments. This can help you to not only pay off your car loan but also other debts you may have.
Start by paying off your smallest debts or highest interest ones. Once paid off, take the money you were paying to them and put it towards your next largest debt. You will continue this pattern until all your debt is paid in full.
8. Make the Most of Your Tax Refunds
It may be a painful idea to be putting your tax refunds and bonuses towards your car, but in the long run, it will help to free up money and save some in the future. Even applying your pay raises to your car is a great method for paying it off fast.
Since pay raises aren’t a large increase per paycheck this small amount can easily be applied towards your car loan. This is a slow process, but in time it will help to bring down your loan’s overall balance.
9. Earn Some Additional Income
If you can gather any extra cash to pay off your loan then looking for ways to earn extra income isn’t a horrible idea. You can look for unconventional jobs to fill your free time with and in turn earn some extra cash to go towards your loan.
You can even do things such as renting out an extra room in your home, having a yard sale, or even doing some yard work for friends and neighbors. There are many ways in which you can earn some extra cash on the side and pay off your loan a few months sooner than projected.
10. Reduce Your Extra Expenses
By reducing expenses that aren’t necessary you can save some cash and put that towards your loan. By temporally cutting out items in your monthly budget, you will notice a large free up in cash.
First, we recommend looking at your bank or credit card statement. Look at the charges and see what your money goes to the most, is it beer or eating out? Add these charges up monthly to see how much you’re spending.
Usually, people can save hundreds by doing this. You can even look at things such as getting rid of cable or lowering the data on your phone. The money you save by cutting these things out should be put towards your loan.
11. The Lower Your Loan Is the Higher the Credit Score
As you make monthly payments that are on time your credit score will rise. Also, as you pay off your loan your debt will become lower, improving your debt to income ratio.
Usually, lenders will look at this ratio to judge your ability on paying off loans. With this said, if you’re looking to get another car soon having one that’s already paid off on your credit score will make you more favorable to the lender.
12. Sometimes Paying off a Loan Will Hurt Your Credit
There is a possibility that paying off your loan could end up hurting your credit score. If you lack another type of installment loan on your credit report you’ll be limiting your credit diversification.
If you don’t have other loans on your account then your credit may dip slightly after paying off your car loan. If your credit does dip we don’t want you to sweat it. You can have it bounce back fast by applying for a credit card and making monthly payments.
Now You Know the Top Tips for Car Loan Users
We have provided you with the top tips for car loan users. From paying off your loan early to save on interest to look at how your credit will be affected when you pay your loan off, you can now go ahead and make the financial decision that’s right for you.
Visit our website for more financial tips and information and apply for financing today!