A car loan is one of the most significant types of debt people will have in their lifetime. Some terms even have borrowers paying for eight years straight.
It’s a big financial responsibility and a liability that ties up part of your income for some time.
In addition, you’ll want to pay as early as possible because the longer the debt is present, the more you’ll pay in interest.
Thankfully, there are ways to help you pay off that loan early, so you can free up your money to spend on other things.
Here are 10 tips to help you accelerate your path to freedom from auto loans.
1. Examine Your Current Loan Terms
Not all loan agreements have good exit strategies for the buyer. You may want to pay it off early, but the lender wants to keep you for long periods.
You’ll figure that out once you examine the loan terms. If your loan uses a simple interest rate calculation, paying off the loan fast will be a good move.
Lowering the principal will also reduce the interest rates you pay each month.
If you want to start paying off the principal, make sure to confirm with your lender. Some loans do not let your extra money pay off your principal.
Instead, they become reserved payments for the next cycle. You can avoid this hassle through a simple call.
Some lenders also implement penalties for trying to pay the loan early. It’s an added fee charged to you if you want to be free of debt faster.
If you want to save money, the penalty may negate that and still have you pay a substantial amount.
Even with the penalty, you may still want to pay the loan early, though. It will still put you one step closer to paying off your loan
2. Divide Your Payments
People usually pay loans every month. That means, of course, that a borrower pays 12 full months within a year.
A simple strategy to accelerate your payments is to divide them into two. Instead of paying once a month, consider paying half the amount every two weeks if you can.
It doesn’t seem like much, but it can ensure that you pay off the debt months faster than anticipated.
Just make sure that if you go with this strategy, that you have enough funds to make it work. If not, that’s completely okay – there are plenty of other strategies you can try.
3. Use the Round-Up Method
Another strategy that will not cost borrowers much is the round-up method. Instead of paying the exact amount, round it up to the nearest $50 or $100.
The small addition means that you’re making a dent in the principal. Over time, it will mean savings of hundreds of more because you’re cutting down your interest rate.
The more you can give to reduce your loan, the faster you’ll pay it off. However, you need to balance your other financial obligations and the auto loan.
A round-up is a simple yet effective way to speed up payments, and you can couple it with different strategies.
4. Try Refinancing Your Loan
Your auto loan can be a burden, especially if it comes with additional fees or a high-interest rate. You may feel like there is no way out of it, but there is a method to improve your situation.
Seeking refinancing options can ease the burden on your income by opening up better payment terms. The key is to find a lender willing to refinance with better terms.
You’ll need to shop around to find the best offer available.
However, you won’t be able to get good refinancing options if you’re still early in the loan. The best time to do this is if you’ve increased your credit score significantly.
If you’ve gotten to a higher bracket, more loan options will open up.
While refinancing reduces the stress on your finances, you should still aim to pay the loan fast. The money you save monthly can add to your payments to the loans’ principal.
You can also seek terms that allow you to pay the loan early and avoid prepayment penalties.
5. Reduce and Eliminate Other Debt
Different debts have interest rates and fees you need to manage. All of them can be hitting your finances hard when they add up.
Ideally, you want debt to take out 30 percent of your income at most. That leaves enough for other obligations and pocket money.
Reducing any existing debt can free up money that you can use for the auto loan. There are two ways to go about this:
- Snowball - Prioritize paying off the smallest debts first. Each debt you complete will free money which you can then use to target the next debt. Eventually, all those savings can become extra money you can use to pay off the auto loan.
- Avalanche - You pay off the highest interest rates in an avalanche strategy. Even if you tackle bigger loans, hitting the principal on debt with high interest can save a lot of money. You lower the principal, lowering the fees associated with them after each payment.
Both strategies work to reduce debt, no matter what you use. The money you save here can become a tool so you can pay more towards your auto loan.
6. Use Bonuses and Gifts
An additional big payment apart from your monthly (or biweekly) contributions can make a dent in the loan’s principal. While many of us don’t have the capability of producing a large amount fast, there are times of the year when you can earn more than your income.
- Work Bonuses - One is to use work bonuses like a Christmas bonus or other benefits. Or, if you’ve been working at a company for a while and you haven’t gotten a raise, you could consider asking for one. If you don’t have any big plans for that money, using it for debt can be a weight off your shoulders.
- Gifts - Another is to use holiday gifts like from friends and family. Some will end up giving you cash gifts, and you can use some of this to pay off your loan.
It doesn’t have to be much, either – every dollar counts.
7. Find Additional Income Streams
You will often feel the weight of your auto loan the most because it’s taking a large cut of your primary source of income.
One solution which can free up more space financially is to get another income stream.
The most obvious will be to try and get a second job or a side hustle. However, it can be tiring and daunting to work more hours than before.
The key here is to find an opportunity that doesn’t take as much of your time.
It’s usually better to find something that works with your interests because that can make it easier to do work.
Others may require a bit of investment but can provide greater returns.
Here are some examples of opportunities you can pursue:
- Freelance work
- Selling online
- Affiliate marketing
- Creating courses or paid content
- Blogging or videos for ad revenue
- Car or home rentals
- Online business
- Investments
The secret to successfully creating another income stream is to focus.
Don’t try to do all these things at once. You’ll only spread your resources thin.
Instead, focus on one until you establish it enough to make it a reliable source of money.
Afterward, you can build another thing if you have the time and energy to do so. All of these have the potential to pay you back in the long term.
8. Avoid Late or Missed Payments
Making payments on time is always the ideal scenario, and you should strive to keep it that way. When you’re late on a payment, you incur additional fees, which can reduce the money that’s hitting the loan’s principal.
Even incomplete payments will mean that you’ll have extra to pay the following cycle. It’s because the interest rates compound.
If you don’t pay off the interest during one cycle, it will generate even more interest. Missing a payment or being late can spiral you into deep debt if you’re not careful.
Not only is that a stressful situation, but your credit score also takes a hit. A lower score can prevent you from getting any future loans and lock you out of the best opportunities.
Even if you’re earning enough right now, an unexpected event like an accident or losing your job can lead you to miss a payment. The secret is setting up an emergency fund as soon as possible.
Ideally, you should save anywhere from three months to a year’s worth of expenses. If you save more, you’ll have more security.
9. Adjust Your Budget
One way to free up more money to pay the auto loan faster is through an examination of your budget. If you haven’t set up a budget before, you may find it surprising how it can help save money.
When you start itemizing your expenses, you’ll notice patterns you can adjust. Even buying a cup of coffee from your favorite store every day costs you a lot each month.
The key is to find areas where you may be overspending and allocate the money elsewhere, like the auto loan. It also pays to set limits on how much you can spend for each, so you'll be aware of any excess.
You can also set a fixed amount to your auto loan after you’ve calculated all your expenses. You can increase the amount you pay monthly after putting everything in order.
Like before, make sure that your extra payments go straight to the principal. It can be the highway that leads you to debt freedom.
10. Adjust Your Term Length
Another way to pay off an auto loan fast is through adjusting its term length. You can set this up with your lender and renegotiate the terms.
While it may seem like you’re paying more because of the reduced timeframe, you’re saving money in the long run. The longer you keep a loan, the more interest you’ll pay over its life.
Loans can adjust anywhere from two to seven years. As long as you can fulfill payments without much strain on your finances, a shorter term may be ideal.
You even get the bonus of lower interest rates as they often only come with shorter timeframes. Lenders want these because they can get the money they lent much faster, hence the benefits.
However, there is an argument for prolonging loans. While you’ll end up paying more in the long run, you free up more money monthly.
In that case, it’s important to remember this: if you’re using the extra money to pay the loan’s principal, then you’re already accelerating the payments.
The two approaches can work, depending on your preference and what you feel is best for your situation. While talking with your lender, you can begin making computations to see what’s feasible.
Get the Best Auto Loan Deal Options With 121 FCU
121 Financial Credit Union prioritizes the welfare of its members. We’re not here to prolong the loan but ensure that you’ll get what you need while also providing options to pay what you owe faster.
We offer plans with no prepayment penalties, and you can also opt to refinance with us. Experience competitive interest rates that you won’t get with most lenders.
If you’re interested, contact us today.