Does it Matter How Fast I Pay Off My Car Loan?

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Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - December 8, 2020

How fast you pay off your auto loan does matter. You don’t have to pay it off faster than what was planned, but if you want to, it could mean saving your hard-earned cash and spending less on interest charges.

Your Car Loan’s Length Matters

When you take out a car loan, you usually have the option to choose how long you want to finance. For the most part, it’s recommended that you choose the shortest loan term you can afford. Why? Because of interest charges, that’s why!

Nowadays, nearly every auto loan uses a simple interest formula. That means you’re charged interest daily on the remaining balance of your loan. The less you finance, and the shorter your loan term can be, and the fewer interest charges you stack up.

If you looked at your financing papers and saw how much you’re paying in interest by the end of the loan – and gasped in terror – you could work to pay off your vehicle faster to save some cash.

Tips on Paying Your Auto Loan Faster

If you already have your car loan and you want to pay it off faster, you could still put down large amounts of money. Most auto loans don’t come with prepayment penalties anymore, so if you get a windfall of cash, like a tax refund, you could use these funds to pay down your loan quicker. This doesn’t lower your monthly payment, but it does save you in interest charges and you can end your loan faster than expected.

Another tactic you can use is rounding up your car payment, and most tend to round up to the nearest $50. If you have a payment that’s $220, round it up to $250. Thirty extra dollars each month means paying an extra $360 each year. It doesn’t seem like that much, but in terms of interest, it helps.

Or, some use a method called payment splitting. This involves paying half of your monthly payment before the due date, then paying the rest later around or on the actual due date. This doesn’t allow for interest to stack up as quickly as it would if you waited every month to pay on the due date. Remember, simple interest is accrued daily, so the more often you pay, the less you pay in interest during your loan term.

If you’re looking to start an auto loan, put down a large payment to lower how much you need to finance. This allows you to choose a shorter loan term and have a lower monthly payment. Borrowers with bad credit are typically required to have a down payment of at least $1,000 or 10% of the vehicle’s selling price to qualify for auto financing, too. However, you can always put down more than what’s required of you, and/or use a trade-in.

Used Cars May Save You More Cash

It’s not always possible to get a super-short loan term and have a low monthly payment. It can be hard to finance a car for only a few years these days, with the average selling price of a brand-new vehicle sitting around $40,000.

An old adage that most borrowers used to stick by was the 20/4/10 rule: put 20% down, finance for only four years, and don’t spend more than 10% of your monthly income on all monthly car expenses. But, that advice has somewhat fallen out of practice with the rising prices of vehicles.

Let’s paint a picture: imagine buying a $40,000 car with $8,000 down for a 48-month loan term. Your monthly payment would be around $665 without interest factored in. That doesn’t even include auto insurance, and you need full coverage for any financed vehicle.

Since this scenario is a stretch for the average borrower, many are choosing to finance used cars instead. Used vehicles are almost always less expensive than their new counterparts, which means typically a lower down payment requirement, a smaller financed amount, and a lower monthly payment.

With all that in mind, you’re more likely to qualify for a shorter loan term on a used car. Borrowers with poor credit are also more likely to qualify for used vehicles for the lower sticker price and the more manageable monthly payment.

Choosing the Right Lender for Your Credit

Figuring out the right length of your auto loan is important to successfully completing the loan, so try not to be a payment shopper. Don’t focus all of your energy on getting a low monthly payment by stretching out your loan term, because it can cost you more money in interest charges. Choose a loan term that fits your monthly budget, allows you to pay off the car in a reasonable amount of time, and doesn’t gouge you in interest charges.

However, all that doesn’t matter too much if you can’t get approved for an auto loan. Many borrowers with low credit scores have a hard time finding a dealership with bad credit lending resources, but we’re working to change that.

Here at CarsDirect, we’ve put together a nationwide network of dealers that are signed up with subprime lenders – they’re equipped to help in unique credit situations. To get matched to a dealership in your local area, fill out our free, zero-obligation car loan request form. We’ll get right to work looking for a dealer that’s equipped to handle bad credit borrowers.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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