There are many things you can do to find ways to pay off your car loan faster. But while you can pay off your car loan early, it’s not always the best financial choice.
Consider the various methods listed below for working toward an early payoff, as well as whether this move makes sense for you.
Paying off your car loan faster than the original repayment schedule can save you money on interest and free up cash in your budget But what is the fastest way to pay off a car loan? There are several effective strategies to choose from,
Refinancing to a Shorter Term
One of the quickest ways to pay off your auto loan early is to refinance to a shorter loan term. For example, refinancing from a 6-year loan to a 3-year loan means you’ll make higher monthly payments but pay off the loan in half the time
Getting a lower interest rate can also help you pay off your car loan faster if you put the extra money you save each month toward the principal. Just keep in mind that refinancing costs money, so make sure that the savings on interest over time are greater than the costs up front.
Making Biweekly Payments
By dividing your monthly payment in half and paying every two weeks instead of monthly, you’ll end up making an extra monthly payment each year.
For a 4-year $20,000 auto loan at 5% interest, biweekly payments of $477 instead of monthly payments of $954 will pay off the loan nearly a year early and save $414 in interest.
The interest that builds up between payments is also lessened by making payments more often. Another easy way to pay off your car loan faster without making a big monthly payment is to
Rounding Up Your Monthly Payments
Rounding up your regular monthly payment to the nearest $50 or $100 can make a surprising difference over the life of your loan. The extra cash goes directly toward the principal to pay off your balance faster.
For example, rounding up a $400 monthly payment to $450 on a 5-year auto loan can pay off a $15,000 balance 4 months early and save over $300 in interest.
Making an Extra Lump Sum Payment
When you receive a financial windfall like a tax refund or bonus at work, consider making an extra lump sum payment on your car loan principal. Even a single additional $1,000 payment could knock off several months from a 5-year loan term.
The key is to specifically direct the extra funds toward the principal. This minimizes the interest you pay and shortens the time until your loan is paid off.
Opting Out of Add-On Services
Check your auto loan agreement to see if you’re paying extra for things like a maintenance package, an extended warranty, or GAP insurance that you don’t need. Cancel any services you don’t need.
Rather than spending the refund, have your lender apply it directly to the principal balance. This extra one-time payment will help speed up your payoff date.
Paying On Time Every Month
No matter how much extra you’ve paid lately, it’s important to keep up with your monthly payments. If you don’t, interest that you haven’t paid will be added to your balance, making any extra payments pointless.
Staying current on your scheduled monthly payments will ensure you pay off your car loan as fast as possible. An autopay discount can also help lower your interest rate.
Should You Pay Off Your Car Loan Early?
Paying off your auto loan faster definitely saves money on interest. But it’s not always the smartest financial move depending on your circumstances.
Here are some signs that an early payoff makes sense:
- You want to reduce debt and improve your finances
- Your interest rate is high compared to current market rates
- You have access to extra cash to put toward the principal
However, paying off your car loan early may not be advisable if:
- You would owe a prepayment penalty
- Your loan uses precomputed interest
- You have very little outstanding debt and a good credit score
Consider your entire financial picture to decide if an early car loan payoff aligns with your goals or if you’re better off sticking to the original loan term.
The Fastest Way to Pay Off a Car Loan
The absolute fastest way to pay off your auto loan early is to pay off the entire remaining balance at once. But since most people don’t have enough cash on hand to do that, the next best options are:
- Refinancing to a shorter loan term
- Making biweekly (instead of monthly) payments
- Rounding up your regular monthly payments
- Putting extra windfalls like tax refunds toward the principal
- Canceling unnecessary add-ons and applying fee refunds to the balance
Using a combination of these strategies can help you pay off months or even years faster than your original car loan term. The sooner you pay off your loan, the more interest you’ll save over the long run.
Put extra money toward a lump-sum payment
If you can’t afford to pay extra money toward your auto loan every month, consider doing so just whenever you have surplus funds on hand.
Windfalls, like your tax refund or a bonus at work, can go a long way toward paying off your auto loan early. Ideally, any extra money you pay should be added to your principal balance to lower the total amount you owe. This is for all of these examples.
For example, if you have a $20,000 car loan with a 7% interest rate and a five-year term, making an extra payment of $2,000 can help pay off your loan faster:
| Monthly payment | Monthly payment + $2,000 windfall | |
|---|---|---|
| Total monthly payment | $395 | $395 |
| One-time additional payment | N/A | $2,000 |
| Total interest paid | $3,761 | $2,991 |
| Interest savings over the life of the loan | N/A | $770 |
| Number of months to pay off the loan | 60 | 53 |
Round up your payments
You might want to round up your payments to the next $50 or $100, depending on how much cash you have on hand. Whatever number you choose will depend on how much money you have left over at the end of the month.
If you round up your payments, you’ll be chipping away at your remaining balance faster. Just be sure to verify with your lender that the extra money you’re paying will go to paying off your principal loan balance rather than paying future interest charges.
For example, here’s what rounding up could look like if you have a $25,000 auto loan at a 7% interest rate and a five-year loan term:
| Monthly payment | Monthly payment +$50 | Monthly payment +$100 | |
|---|---|---|---|
| Total payment amount | $495 | $545 | $595 |
| Total interest paid | $4,701 | $4,179 | $3,762 |
| Interest savings over the life of the loan | N/A | $522 | $938 |
| Number of months to pay off the loan | 60 | 53 | 48 |
How To Way To PAY OFF Your Car Loan in HALF the Time!
FAQ
How can I pay off my car loan faster?
Quick Answer. You can pay off your car loan faster using several strategies, including refinancing your car loan, making biweekly payments, putting money toward extra lump-sum payments and canceling add-ons.
What happens if I pay an extra $100 a month on my car loan?
Making an extra $100 monthly payment on your car loan will reduce the total amount of interest you pay and shorten the loan term.
What’s the smartest way to pay off a car?
The bottom line Refinancing — or just making extra payments — are the best ways to pay off your car loan faster. Even if it’s just a few extra dollars, you will reduce your debt and may cut a few months out of your loan.
How to pay off a 5 year car loan in 2 years?
How to pay off your car loan fasterMake bi-weekly payments. Round up your monthly payment. Make one extra payment per year. Use extra money to make a payment. Refinance for a better rate. Check into discounts or optional add-ons.