4 Ways to Pay off Your Car Faster
Perhaps the best ride you’ll ever take in your car is on the day it’s 100% yours. The quicker you can pay off your car, the sooner you can take the wheel with complete financial peace of mind. Your bank account will thank you — with the average price of a new car in the US at $34,047 in 2019, and around $20,000 for a used one, it’s a significant debt burden just for the privilege of getting from point A to B. If you can release yourself from those payments early, you’re giving yourself back time and money.
Why Pay Off Your Car Loan Faster
With some car models losing up to 50% of their value in just five years, car ownership is a battle against depreciation. The quicker you can exit those monthly payments, the earlier you can reclaim the upper hand and ultimately pursue your financial freedom endgame. Paying off your car faster will improve your credit score and reduce your overall borrowing burden. In a sense, it’s about dipping deeper into your pocket today to liberate some extra cash in the budget later.
How to Pay off Your Car Faster
Your first step should be to check your credit score to get a snapshot of your current financial health and to draw up a list of your monthly income and spending. To be prudent, you should only pay off your car loan early if you can manage the temporary extra expenditure. If you have other loans with higher interest rates, prioritize those. Once you’re committed to paying off your car faster, try these top four tips:
Refinance your existing loan
If your credit score has improved since you took out the loan, you might be able to take advantage of better interest rates on the remaining balance. However, never extend a loan term to get a lower monthly payment, since you could end up paying more than you would have originally.
Decrease term length
Given the high cost of new and used cars, loan terms are typically between two and seven years. If you can afford to increase your monthly payments through extra income or bonuses, use that extra cash to reduce the term of your loan. A little belt-tightening now while income is healthy will help you reach financial freedom faster.
Make extra payments
Another way to reduce your loan term is to make overpayments, as in paying bimonthly instead of monthly, or using any lump sum bonuses or commissions during the year to reduce your balance. If your interest is calculated on the outstanding balance, you’ll make some serious headway into paying off your principal faster if you can allocate extra income to paying off debt.
Round up your payments
Perhaps you only want to divert a modest amount of your income to paying off your car faster. In this case, you’ll make progress without feeling the pinch if you simply round up your monthly payment to the nearest hundred. For example, if increasing your $350 monthly payment to $400 doesn’t hurt your budget drastically, it will improve your financial health surprisingly quickly.
What to Bear In Mind When Paying off Your Car Loan
It takes a certain amount of self-discipline to pay off a car loan faster. Along the way, there might be lean moments when you’re invited to take a payment holiday or to extend your term. But once you’ve resolved to pay off your car faster, try to stick to your objective. Watch out too for any prepayment penalties that may apply from your lender. Always share your goal and strategy with your lender and discuss any small print that may apply. The goal will be much easier to achieve if you have their support.
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