How to Pay Off a Car Loan Faster
Freeing up extra cash each month can help consumers stash away savings for unexpected expenses or as an emergency cushion. One of the easiest ways for income to surpass expenses is to pay down debts like credit cards and car loans.
When loans and other debts are paid in full, consumers can allocate that money to savings, investments or pay down other debts. Paying down a car loan early also could help car owners save money on interest. Here’s how to pay off a car loan faster and erase that debt from the expense column of the budget.
Refinance the Loan
Loan terms and monthly payments may be based on a consumer’s credit score. Lower credit scores may lead to higher interest rates. When rates are higher, this increases the monthly payments. Some buyers may opt for a longer loan term (more than 60 months), as a longer loan term could keep those payments lower when the interest rate is higher.
A longer loan term can be an issue because depreciation over time will lead to the car buyer owing more than the car is worth. In fact, the buyer faces negative equity immediately with a longer loan. When buyers agree to a longer loan term, it will take them longer to build up equity in their vehicle. In addition, choosing terms longer than 60 months will lead to higher interest rates than financing for a shorter term.
Some buyers might have no other option than to choose a longer loan term. This might be the only way they can afford the vehicle. Buyers don’t have to be stuck with these longer loans, though.
Credit scores can recover, and buyers can then elect to refinance the loan. If their credit score has improved, they may qualify for a much better interest rate. They may be able to finance the vehicle for only a few years and pay it off quickly.
If a buyer is facing a long loan term, refinancing could be one way to make the loan payments more affordable and pay the loan in full sooner than expected.
Use a Budget Surplus or a Tax Refund to Pay Down the Loan
If car owners have extra income during the month that exceeds their expenses, they may elect to apply a little extra to the principle on their loan.
For those who receive a tax refund each year, this extra surplus can be used to help decrease debts. If the car loan has a higher interest rate, or if the car owner just wants to pay it down sooner, use part of the tax refund to lower the principle on the loan.
Car owners also could double up on payments each month, if it’s financially feasible. Doubling the car payment could help to quickly pay down that loan.
When paying ‘extra’ on a car loan, buyers might need to make a note on the payment coupon that they are applying the extra payment to the principal. While some financial institutions may automatically apply it to the principle, others may apply it to interest. Car owners should review their loan statement to find out how to mark payments to ensure that the extra will be applied to the principle.
If car owners are hoping to get a credit score boost from paying off their debt early, they may be surprised to find out that it actually could do the opposite. Credit scores are tied to several different factors, including the length of credit (or credit history), different types of credit (credit mix) as well as the credit to debt ratio. Paying off the loan could affect one or more of these areas.
Debt Snowballs and a Debt Avalanche
Car owners might want to apply a portion of their refund to debt with the highest interest rates (like credit cards) and use a smaller portion to pay down their car loan. For many consumers, car loans may have a lower interest rate than other debts.
Other consumers want to pay down their car loan first, because it could be their smallest debt. The idea of removing a loan from the expense column could make a car owner feel a sense of freedom. Paying off the loan means they own the car outright.
Experts typically recommend paying down the debts with the highest interest rates first. Tackling high interest rate debt first is known as the ‘debt avalanche method.’
Some consumers prefer the ‘debt snowball method.’ This means that the smallest debt is paid first. While the debt avalanche technique may help buyers save more money on interest, the debt snowball method can help consumers feel that they are making headway quicker.
When car owners have extra money to apply to their debts, including their car loan, they need to decide what debts they want to tackle first. There is no right or wrong decision. There are pros and cons to both the debt avalanche and the debt snowball methods.
The Ultimate Pro of Paying Off a Car Loan
Paying off a car loan doesn’t just erase a major monthly expense; making a final loan payment means that the car is now owned outright. The lien that the financial institution held on the vehicle is released once the loan is paid.
When a car loan is paid in full, the car typically still holds some resale value. While that value may be low, the car has transformed from a debt into equity. For car owners this means that a car can be traded in to help decrease the cost of a new car. The car also could be privately sold.
Buying a Car with the Best Financial Terms
When buying a new car, consumers need to understand how much they can pay for the vehicle and how they intend to finance the cost of the vehicle. Buyers also will want to research their financing options to find the best loan terms and the best monthly payment.
Some buyers might need longer loan terms to ensure that the monthly payment fits comfortably into their budget. However, shorter loan terms lead to owning the car sooner and paying less interest.
Car buyers can use Carzing to find the best car for their needs and find financing that fits their budget. Carzing includes an easy search query tool that lets buyers find cars based on price, make/model, body type or just enter specific keywords.
All results can be narrowed further by selecting additional vehicle criteria from the toolbar found to the left of the results. Car shoppers can specify drivetrain preferences, vehicle equipment, fuel type, transmission and more. They can even opt to omit used cars or new models.
To simplify the search, Carzing also lets shoppers sort their results by price, distance, age, mileage or just by the best match. See the least expensive options first or view the vehicles with the lowest mileage at the top of the list.
When buyers find their ideal vehicle, they can use Carzing to get prequalified for financing. Carzing gives the buying power to the consumer. Choose the financing with the shortest loan term, or select the financing that offers the lowest monthly payment. The buyer is in control!
Once buyers find their car and their financing, print out the details and take it to the dealership. Instead of wandering the car lot trying to find the best vehicle among hundreds, buyers go into the dealership knowing exactly what they want.
Spend time at the dealership on the important details like completing the credit application and taking the car for a test drive. Carzing empowers buyers to find the car and the financing that is best for their needs. For buyers who want the shortest loan term, Carzing makes it easy to sort through the options and find the best loan.