12 Hacks to Pay Off Your Car Loan Faster
At a Glance
As of summer 2023, the average interest rate for an auto loan in the U.S. ranges between 11% and 22% based on credit score. If you have a car loan, paying it off early can not only save you money on interest but also offer peace of mind and a level of financial security. Here, we’ll offer strategies to help you do so. However, before you take any of the below steps, it’s important to read your loan contract and determine if there are any prepayment penalties. If so, it may not be a smart financial move to pay off your auto loan sooner.
12 ways to pay off a car loan fast:
1. Bimonthly payments
Making multiple payments per month, rather than just one, is one of the best ways to pay off debt early if you can afford it. To make this process seamless, consider setting up bi-monthly payments on autopay to ensure payments go out on time. You’ll also want to reach out to your lender and request that your money be applied to the principal (not the interest). This technique will reduce the total amount of interest you pay and will likely improve your credit score as you lower the amount owed. Plus, you’ll pay off the auto loan twice as fast.
For example, say you have a $20,000 loan at 6% APR with an initial loan term of 72 months:
| Monthly Payments | Bi-Monthly Payments | |
|---|---|---|
| Payment amount | $331.46 | $165.73 |
| Payments in a year | 12 | 26 |
| Annual amount paid | $3,977.52 | $4,308.98 |
| Total interest paid | $3,864.96 | $3,468.43 |
| Interest savings | N/A | $396.53 |
2. Round up your payments
If you can’t make double payments every month, even adding a few dollars to your payment will help you get out of debt more quickly. Consider rounding up your payment to an even number, i.e., from $238 to $250. Add whatever extra you can afford and adjust your budget accordingly. You just might shorten your loan term by a payment or two at the end.
Real Stories
Jacob Carter, Owner of Engine Rev Up, used a car loan to buy his dream car, a classic '68 Mustang. I refinanced that loan quicker than a hot rod at a green light, got myself a lower interest rate. Next, I employed the old 'round-up' method. Every time I had a payment, I'd round it up to the nearest hundred. If the payment was $275, I'd pay $300. Didn't seem like much each time, but let me tell you, those extra bucks started to add up. With a combination of refinancing, rounding up, and some good old-fashioned hustling, I managed to pay off that loan quicker than you can say 'zero to sixty'. Now, that Mustang's loan-free and purring like a kitten, and there's nothing quite like cruising down the highway in a car you fully own.
-- By Jacob Carter, Owner of Engine Rev Up
3. Make one large extra payment each year
If you work in an industry where you receive an annual bonus or commission, you could use some of that additional income to make an extra payment on your auto loan each quarter or year. Again, you may need to call your lender to request that these payments go toward the principal and not the interest. Ultimately, these extra annual or quarterly payments could reduce your loan term and interest paid significantly.
4. Make a one-time balloon payment
If you have a high interest rate on your auto-loan and additional debt, you might want to consider a debt consolidation loan. You can apply for a debt consolidation loan for the total amount of all your outstanding debts and then make one balloon payment to pay off your auto loan in full. Keep in mind that this may not be possible if your auto loan has a prepayment clause.
5. Avoid missed payments
Missing payments will only extend the life of your auto loan and the interest you accrue. It will not only take longer to pay the loan, but there also may be late or missed payment fees assessed, which will slow you down and negatively impact your credit score. To stay on track, avoid making late payments or missing them altogether.
6. Refinance for a lower rate
You may have a high interest rate if you applied for an auto loan when your credit score was lower or interest rates were generally higher. But that doesn’t necessarily mean you have to pay that interest rate for the entirety of the loan. If your contract allows and your remaining balance is high enough, you may be eligible to refinance your auto loan with another lender at a lower rate. Or, if the balance is low enough, you may be able to apply for an unsecured personal loan to pay off your vehicle in full.
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