That new car smell fades fast, but unfortunately, the monthly payment hangs around for years. With interest rates fluctuating unpredictably, refinancing isn’t always the best option or even possible for everyone. However, that doesn’t mean you are stuck with that loan for the full 60 or 72 months.
You can attack your car loan aggressively with your current terms. In reality, it just takes a little math and a lot of discipline. By changing how and when you pay, you can free up that cash flow much sooner than the bank expects. Here are the tips for paying off car loans early without the hassle of refinancing.
Round Up Your Payments
If your payment is $465, make it a flat $500. While that extra $35 might seem insignificant to your monthly budget, it attacks the principal balance directly. Because lenders calculate interest based on your remaining balance, lowering that balance faster means you pay less interest in the following month. Over the life of the loan, those small increments reduce the total interest you pay and can shorten the term by several months.
Make Bi-Weekly Payments
Instead of paying once a month, split your payment in half and pay it every two weeks. Since there are 52 weeks in a year, you end up making 26 half-payments, which equals 13 full payments. Consequently, you sneak in a whole extra month’s payment every year without feeling the pinch. Important Note: Call your lender first to ensure they apply the extra payment immediately rather than holding it until the full monthly amount accumulates.
The “Snowball” Method
If you have other smaller debts, pay them off first. Once a credit card is cleared, take the money you were paying on that card and immediately add it to your car payment. By doing this, you keep your total monthly budget the same, but you focus the firepower entirely on the car. This method builds momentum and keeps you aggressive without changing your lifestyle.
Put Bonuses Toward the Principal
Tax refunds, work bonuses, or cash gifts should go straight to the car. Since this is “found money” that you don’t need for bills, it is the easiest way to make a lump sum reduction. Crucially, make sure you specify to the lender that the payment is for the principal only. Otherwise, they might just advance your due date, which doesn’t save you any money on interest.
Avoid “Skip-a-Payment” Offers
Lenders love to offer a “holiday skip-a-payment” as a perk during December. Do not take the bait. Although it feels like a break, the interest keeps accruing during that month. Furthermore, they usually tack the missed payment onto the end of the loan, effectively extending your debt sentence and increasing the total cost of the car.
Check for Prepayment Penalties
Before you go aggressive, read your contract fine print. Some shady lenders charge a fee for paying off the loan early to recoup their lost interest. If your loan has this clause, calculate if the interest savings outweigh the penalty fee. If the penalty is small, it might still be worth it to get out of debt.
Pay Half the Next Payment Now
Most car loans use simple daily interest, meaning interest accrues every single day you owe money. Therefore, if you have a little extra cash one month, pay 1.5 times your payment early in the billing cycle. This lowers the daily average balance that interest is calculated on. Even sporadic extra payments help more than you think by shrinking the balance that breeds interest.
Visualize the Freedom
Calculate exactly what you could do with that car payment money if it were yours again. Could you start investing it? Could you fund a dream vacation? Reminding yourself of the specific goal keeps you motivated to sacrifice the extra cash now. When the finish line is clear, the race feels easier to run.
Keep the Car After It’s Paid
Once you pay it off, keep driving it! The temptation to trade it in for a new one will be strong. Resist it. Instead, drive that paid-off car until the wheels fall off while you stack that cash in a savings account. Paying yourself the car payment for a year gives you a massive down payment for the next vehicle, breaking the cycle of debt forever.
Drive Debt-Free
The freedom of driving a car the bank doesn’t own is a beautiful feeling. Use these tips to get there faster. By taking control of the amortization schedule, you turn a liability into an asset and reclaim your monthly income.
Are you currently aggressively paying down a car? Share your strategy in the comments!
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