When you enter into a car loan, you will have a set number of months to pay off the full balance. While it's perfectly normal to make regular payments and finish paying the loan back throughout the full duration of your loan, more and more vehicle buyers are finding ways to pay that balance back faster - and reap the benefits of doing so.
The Best Ways to Pay Off Your Car Loan More Quickly
So, why would someone wish to pay off their auto loan faster? Reducing an auto loan's payback period has numerous benefits, including lowering the amount you pay in interest, shortening your loan term, and improving your credit score.
Round Up Your Payments
Auto loan payments are figured using a simple formula that typically does not end in a round number. The payment is calculated by taking the vehicle's purchase price (minus the down payment), adding the interest costs (which are determined by the length of your loan term), and dividing that amount by the number of months in your loan term.
In order to round up, you would take your monthly amount, say it's $264.73, and round it up to $300. By paying the extra $35.27 every month, you'll pay an extra $423.24 off of your vehicle loan each year - which is more than a full month's payment.
Make Bi-Monthly Payments
Making bi-monthly payments on an auto loan works really well for individuals who are paid twice per month. What they do is take their monthly payment, split it in half, and make half of their monthly payment with each paycheck. Beyond helping you pay off your auto loan more quickly (you'll come out one full month ahead by the end of the year), this also can be easier for those looking to balance their monthly budget.
Dedicate Extra Money to Your Payments
With the popularity of money-saving tips, there is no shortage of online advice for saving a few dollars and cents here and there. What I'm recommending here is taking that saved money and contributing it toward your auto loan.
For instance, if you collect your spare change at the end of each day, save it up and put that money toward your auto loan. Similarly, if you decide to cut out your daily coffee shop visit and instead bring your own brew, you can decide to put the money you're saving on coffee toward your auto loan.
Make an Extra Auto Payment from Your Tax Return
When you receive your tax return, consider using a portion of it to make an extra payment to your auto loan. Tax return season is one time where many people have a little extra money in their bank accounts, and putting that money toward your auto loan can be an easy way to reduce your payback period.
The universal benefits of paying off your auto loan faster than your loan term specifies are undeniable. Whether you're hoping to save money on interest or wondering how to improve your credit score, following one (or more) of the above strategies will help you do just that.