11 Hacks to Pay Off Your Car Loan Faster
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.Read full bio
At a Glance
The average interest rate for a five-year auto loan in the United States is 5.27%. It’s classified as a secured loan because your vehicle is the collateral. If you don’t make your loan payments, the lender will repossess the car. That makes this debt a priority. Paying it off early can bring peace of mind and a level of financial security.
Here are eleven ways to do get out of a car loan fast:
- Biweekly Payments: Pay twice a month instead of once a month. This is one of the best ways to pay off debt early if you can afford it, and you can set it up on autopay to ensure payments go out on time. This technique will reduce the total amount of interest you pay and will likely improve your credit score as you lower the amount owed.
- Round Up Your Payments: Add a few dollars and cents to make your month payment an even number. This won’t help you get out of debt as quickly as making two payments a month, but it might shorten your loan term by a payment or two at the end. Add whatever extra you can afford and adjust your budget accordingly.
- Make One Large Extra Payment Each Year: Some people work in fields where they receive an annual bonus around the holidays. You could use that to splurge on holiday spending or make an extra payment on your auto loan. Both could be considered gifts. Paying the loan will make the next holiday season more enjoyable.
- Make a One-Time Balloon Payment: Consumers often do this when they take out a debt consolidation loan. Most lenders don’t lump the car payment into the mix when they calculate a DC loan size, but there is usually some extra money left over after the credit cards are paid off. Use that to reduce the balance on your auto loan.
- Avoid Missed Payments: The topic of this list is how to pay off your car loan faster so we’d be remiss not to mention that missed payments will bring you the opposite result. It will take longer to pay the loan and there may be late or missed payment fees assessed which will slow you down. You’ll also lower your credit score.
- Refinance for a Lower Rate: You may have a high interest rate if your credit score was less than perfect when you bought the car. Wait a year, make your payments on time, and apply for refinancing to save money on interest. If the balance is low enough, apply for an unsecured personal loan to pay it off in full. Then, you’ll own the car outright.
- Use Your Tax Refund: With the uncertain economic times we’re living in, the once joyful anticipation for tax season isn’t what it used to be. Many consumers use their tax return money to pay off holiday debt. That’s not a bad idea, but when you pay down your car loan, you’re addressing what is typically your second-highest monthly payment.
- Freeze Extra Spending: This is the same advice you’ll get if you’re attempting to use the debt snowball or debt avalanche method to pay off credit card debt. Stop spending your extra cash frivolously and focus on getting your debt paid off. Limiting your spending could give you the extra funds to take many of the suggestions on this list.
- Find a Side Hustle: You won’t need extra motivation once you understand debt and its implications on your life. Carrying an auto loan, a mortgage, and credit card debt is expensive. To deal with these debts, you’ll likely want to increase your income. Find a side hustle where you can do that. It can be an online gig or a second job.
- Host a Yard Sale: This might not be the fastest way to pay off car loans, but it could be the most fun. Host a yard sale. Put all your useless or no longer needed items on the front lawn and watch your friends and neighbors take them away. Use any money that you make to pay down the car loan. This is one car loan hack you can do more than once.
- Ask Your Boss for a Raise: Do you want to know how to pay off your car loan faster? Ask your boss for a raise. If the company values your services, they might just give it to you. If not, and you’re not making enough to make your car payments every month, it’s time to look for another job.
What is the fastest way to pay off a car loan?
The fastest way to pay off a car loan, short of one lump-sum payment, is to make double payments each month. Do these biweekly to make the budgeting more manageable, and you’ll pay off your car loan in half the time.
Is it bad to pay off a car loan early?
Always check your auto loan contract before paying it off early. There may be a prepayment penalty for paying the loan off early. If that penalty is more than the amount of interest you’ll save with an early payoff, don’t bother doing it.
Is it better to pay principal or interest on car loans?
Always pay on the principle when you make extra payments. There should be an option to do this on the lender’s website. This will ensure you lower the amount on which you’re charged interest, and thus, lower the amount of interest you’ll pay as well.