How to Pay Off an Auto Loan Sooner, Rather Than Later
When you purchase a brand-new vehicle, whether it’s for the family or a high-end vehicle, chances are high that you financed it. However, buying a new car is different compared to other financing deals on different products. Unlike something such as buying a home, when you finance a vehicle, you’re paying off a loan (and interest) for a depreciating asset.
Importantly, this asset depreciates more quickly than many others. According to Carfax data, cars lose more than 10 percent of their value during the first month after purchase. Within 12 months, the value can drop by as much as 20 percent. Then, for the next four years after that, it will lose an average of 10 percent of its value annually.
This expedited depreciation makes for a good reason to pay off a car loan as quickly as possible. Other reasons include saving on the interest, reducing your debt-to-income ratio, and to simply having less debt in your life.
With those benefits in mind, how can you pay off your auto loan faster?
Making Half Payments Every Two Weeks
One option to pay off an auto loan faster is to make bi-weekly payments rather than paying once a month on the loan. You would pay half your car payment every other week.
So where’s the advantage?
There are 52 weeks in the year, so you would be making 26 half-payments amounting to 13 full payments. You’re getting in an extra monthly payment for the year if you go with this option.
The major downside is that you’ll have to keep up with making more payments a month, but you could combat this by doing an automatic draft from your account every other week. You’ll also have to plan ahead from a budgetary standpoint and make sure this is feasible for you.
Make a Large Lump Sum Payment at Least Once a Year
If possible, making a large lump sum payment in addition to regular monthly payments can help you pay down an auto loan faster. Maybe your tax refund could be put to use in this way, or maybe you received a bonus and need to spend it.
At any rate, putting that money to debt reduction may be helpful overall. If you make larger payments that are beyond the minimum payment, you’re reducing how much you pay in interest, and you’re taking a larger chunk out of the principal.
The only real downside to doing this is that you need to have the cash available to make a lump sum payment.
Round Up Payments
Paying the minimum on your car payment each month is going to be the slowest route to getting it paid off. Making even small changes can be helpful. One small change you can make is rounding up your payment. If you have a car payment that is $450 for example, maybe you round it up to $500 each time you make a payment. You’re then putting an extra $600 toward your auto loan annually.
If you’re able to do more than that even only with a few of your payments, it’s helpful.
Make a Normal Payment and a Small Interest Payment Each Month
Paying directly on the principal of an auto loan is important because it will help you finish the loan more quickly. However, it may also be worth it to make a small payment purely for to cover accruing interest. If you can time the second payment right, then your next normal payment should be devoted to predominantly paying off the principal balance.
This can be an especially useful repayment tactic depending on your loan. Some lenders are known for having high car loan interest rates, so it literally pays to come up with a workaround to mitigate the cost of high interest. Making a quick interest payment in addition to a standard monthly payment can help accomplish this.
Conclusion
Auto loans are debt and more than that. They’re debt that you’ve taken on for a depreciating asset. It’s financially wise to pay off an auto loan as quickly as possible in most situations. The above scenarios don’t require refinancing an auto loan or taking out another loan, and they can make a difference in how much you pay over the life of your auto loan.
By Andrew from LendEDU – a consumer education websites and personal finance resource.
