One of the three biggest expenses most families have is transportation costs.
Depending where you live, a car may be a necessary expense, but that doesn’t mean it has to eat your whole paycheck.
If you’re struggling with a car payment try these tips to help you pay off your car faster.
Know Your Balance, Interest Rate, and Potential Payoff Penalties
Before you dive into paying off your car, it’s worth finding out what you currently owe, what your interest rate is, and if your lender imposes any payoff penalties.
This may affect your strategy moving forward. If there’s a payoff penalty, you’ll need to take that into account when you do the math to figure out what options are right for you.
Ways to Pay Off Your Car Faster Without Paying More
Assuming your finances are the same now as when you bought your car, it’s probably not possible to throw huge chunks of cash at your auto loan.
But that doesn’t mean you can’t still find ways to pay off your car faster.
Here are some strategies that will help you pay off your loan more quickly without paying more.
Refinance Your Auto Loan
First thing’s first, figure out what your interest rate is for your car loan.
It might have seemed like you got a great deal when you bought your car, but if you haven’t checked interest rates lately you may be over paying with a higher interest rate.
Also, if you financed through the dealer or a big named bank you may not be getting the most favorable rate.
Make a note of your current rate and then price comparison shop online to see if you can refinance at a lower interest rate.
Often times credit unions will have the best loan terms, but it pays to do your research on this one. Bankrate is a great resource to see what rates may be available to you.
Anything over 750 should qualify you for the best rates. If you’re coming in below that, try these tips to increase your credit score.
With just a couple simple actions you can increase your score pretty quickly.
It’s easy to get caught up in the desire for security and safety when buying a new car.
Most of the time we’re shopping because something happened to the old one so it’s no wonder you want to make sure this new one is covered for a while.
But those extra coverages can add up.
Add-ons like GAP waivers, service contracts, extended warranties, tire and wheel warranties, and other extra coverages may be inflating your auto loan.
Call your lender or dealership to check if you have any add-ons, then determine if you want to keep or cancel any.
If you’re underwater on your loan or have a history of needed repairs, it may be worth keeping some coverages, but if you can cancel unnecessary add-ons you can reduce your loan and shave some money off your monthly payment.
Split Your Payment
Splitting your loan bill into two payments per month is a great way to make quick progress toward paying off your auto loan without actually paying more.
By making more frequent payments you’re able to reduce the balance faster. This has the added benefit of gradually lowering the amount of interest you’ll pay as well.
Paying more frequently allows you to pay less over the long run without having to feel the pinch of scraping together more money.
Look Into Rate Discounts
If you’ve already refinanced or decided against it, you may still be able to lower your interest rate.
Check with your lender to see if they offer a discounted rate for automated or paperless billing. We’ve been able to take advantage of this trick with multiple loans and bills over the years.
Most recently we received a 0.5% discount on our car loan’s interest rate simply by automating the payments.
It may not seem like much, but lowering the interest rate even a little bit will help you reduce the total amount you owe and help you pay off your car faster.
Ways to Pay Off Your Car Faster By Paying More
While the above tips will definitely help you pay off your car faster, you’ll make much quicker progress by finding extra cash to put toward your payments.
If you’re able to find or make more money, these are some great ways to use it to pay off your loan faster.
Make Extra Payments to Principal
The principal is the amount you owe, minus the interest. By reducing the amount of principle, you reduce the interest being accrued as well as the overall size of your loan.
Anytime you can pay extra toward your principle you’ll save yourself some money and get that much closer to your payoff date.
Round Up Your Payments
Rounding up your payments can be a great way to chip away at your debt without feeling much strain on your bank account.
I like to round things up to even numbers, usually the nearest $50 mark, just to keep things simple.
If you have the option when you pay your bill, make sure to apply this extra amount to principle, otherwise you may just be paying your future interest.
The best way to know if your rounded up payment is going toward principal or future payments is to pay close attention to your next bill.
If it’s lower than usual or the due date has been pushed back that extra money is going toward future payments.
You’ll want to check with your lender to find out how to make sure any overpayment is credited to the loan’s principal.
Apply Your “Extra” Paychecks
If you get paid bi-weekly there are two months of the year that you can expect a third paycheck.
You may be tempted to treat those paychecks like any other, but with a little advanced planning you can make a real dent in your debt by treating them as extra money.
Consider using a portion of these extra paychecks to make additional payments toward the principal of your loan.
This will help you reduce the overall amount you owe and speed up the payoff process.
Apply Windfalls to Your Loan
Most of us probably think of windfalls as some large chunk of cash from an inheritance or lawsuit. But a windfall is actually just any amount of unexpected income that you haven’t planned for.
Most of us will see this in the form of tax refunds, job bonuses, raises, or even credit card rewards.
If you’re on the receiving end of any type of windfall, consider putting at least a portion of it your loan’s principle to pay it off faster.
Ways to Find or Make Extra Money
Now that you know how to apply extra money to pay off your car faster, here are some tips on how to actually find the extra cash to use.
Budget Your Savings to Your Payment
If you’ve been able to save money by eliminating some lower priority expenses, consider re-budgeting that savings specifically to your loan.
Without intentionally budgeting those reclaimed dollars, it’s all too easy to spend them somewhere else.
For example, let’s say you drop your phone service to a lower plan to save $40 a month. Instead of leaving it at that, make sure you move that $40 from your budgeted phone expenses into your car loan budget category so you can actually recognize the savings.
Increase Your Income
If you really want to pay your loan off faster, consider finding ways to earn additional income you can funnel toward your loan. Some options may be:
- Work holidays or pick up extra shifts
- Start a side hustle delivering groceries or walking dogs
- Sell your stuff
- Start a business
With the technology we have today, you’re really only as limited as your imagination when it comes to finding ways to make money.
Check out the Side Hustle School podcast for a constant dose of inspiration to give you some ideas on how to make money from your hobbies and passions.
Reduce Expenses Temporarily
Remember how you determined your priorities when you set up your budget? (You did that right?)
Go back through and see if there are any expenses that you could remove or reduce temporarily.
You may not be willing to totally remove something from your budget, but maybe you can go without while you tackle your loan.
Some areas to consider:
- Reducing entertainment and dining out expenses
- Getting rid of cable
- Downgrading your phone and internet services
- Switching to a higher deductible insurance
- Eliminating memberships and subscriptions
While it may be hard to give up certain things, reminding yourself that it’s only temporary may make it more achievable.
Being burdened with a hefty car payment each month can have a huge negative impact on your budget.
Using the methods above to pay it off as quickly as possible will not only ease your stress but will help you save more in the future.
BONUS: Loan Payoff Calculator
Here’s a handy loan payoff calculator to help you see how different interest rates, loan terms, and extra payments will affect your progress and help you figure out the best way to pay off your car faster.