3 Simple Ways to Pay off Your Car Loan Early and Save Money

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - October 26, 2018

Everybody loves to save money. When it comes to saving money on a big ticket item like your car, it may be easier than you think – all you have to do is pay the loan off early. You may think you don't have a way to get this done, but there are a few simple steps you can take to get the job done without your wallet feeling the pinch.

The Benefits of Early Loan Payoff

There are many benefits to paying off your car loan early, but the biggest one is saving money on interest charges. This works because most auto loans are simple interest loans. With a simple interest loan, interest accrues daily based on the loan balance – the lower the balance, the less interest you're charged. To find out how much interest is accruing on your loan based on your interest rate, you can use an online amortization table. Another benefit to early loan payoff is the chance to get out from under negative equity sooner – when you owe more on your loan than your vehicle is worth.

Paying Off Your Car Loan Early

Let's look at three simple budgeting tricks you can use to pay off your car loan early:

  1. Pay extra whenever possible. This method gets the job done without sticking to a strict schedule. Simply pay more whenever you find yourself with a little extra cash on hand. Any money over and above your monthly payment goes toward reducing the principal on the loan, therefore lowering the amount you owe over time. If you can, try to plan for one of these extra payments to be a large one – after an income tax refund or a bonus at work.
  2. Round up. Each month, simply round up your payment. For example: if your monthly car payment is $432.54, simply round up to $440.00 or even $450.00. Doing this whittles away at the balance, while your wallet barely feels a thing.
  3. Make a half payment every two weeks. Making bi-weekly half payments actually allows you to make 13 full payments a year, rather than 12. This can be especially effective if you get paid every two weeks. Doing this won't save you a ton in interest charges, but it definitely helps get your loan paid off early – sometimes as much as six months depending on your loan term.

You have two choices when making an additional payment. In the first, you can specify to your lender that any payment in addition to your monthly payment should be applied to the principal loan balance. This way, your monthly payment remains the same while you reduce the loan balance and the daily interest charges.

If you don't make this distinction, your lender may treat your additional payment as a pre-payment, reducing your next loan payment by the additional amount you paid. For example, if your auto loan payment is $350 and you use the round up method to pay $375, the additional $25 will come off your next monthly payment, making the payment that month $325.

Both methods decrease the amount of interest you owe over the term of your loan equally, because the majority of auto loans are simple interest loans. The advantage of using the second method, using the same example, is that after 10 months, you’ll have no payment due the following month. This could come in handy if you find yourself in a temporary financial bind down the road, allowing you to skip a month (or more, depending on how long you do this) without incurring any late fees.

Are You Ready for a Car Loan?

If you're ready to put these tactics to work on your next car loan, but don't know where to start, look no further! Here at CarsDirect we can help you find a local dealer that has lenders available to help consumers with all types of credit. You can even use our new and used car buying guides to find your next vehicle. Don't hesitate any longer – fill out our free, easy, online auto loan request form today!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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