There are several ways to pay off your car loan faster, several of them without shelling out an extra dime. Auto debt not only accounts for about 9% of all consumer debt in the U.S., it’s growing: monthly payments are larger and terms are longer than they were a year ago. Paying off your car as fast as possible frees up that money for other things.
How to pay off your car loan faster without paying more
The faster you pay off your car loan, the less you’ll pay in interest. But it may not always be possible to throw more money at your monthly payment. Here are some ways you may be able to pay off your car faster without paying additional money on the loan.
This is the process of applying for a new auto loan to pay off your existing loan, hopefully with a better interest rate or term.
Pros. A refinance loan could help you pay your car off sooner and with a lower interest rate. Maybe your credit score has improved since your original auto loan — the best rates tend to go to those with the best credit. Average rates dropped at the end of 2020 with an average APR of 4.6% for a new car loan versus 5.5% at the same time in 2019.
Cons. Downsides should be few except for the time spent shopping for the best rate and any fees you might have to pay such as those to your state’s department of motor vehicles to transfer your car’s title to the new lender. These costs should be low, under $100.
Who it may be good for. An auto refinance loan may be a good option for you if:
- You have a high interest rate and either your credit has improved since you signed for the auto loan or you’re not underwater on the auto loan, meaning you do not owe more on your car than it is worth.
- You do not face high penalties for paying off your current loan early.
- You got the auto loan through a dealership, especially a “buy here, pay here” establishment. The average hidden interest rate added by dealers is 2.47% and “buy here, pay here” businesses are known for predatory lending practices.
How to do it. Call your lender to find out how much you owe and your APR. Refinance lenders usually ask for this information, so it’s good to have it on hand. Then you can look for the best auto refinance companies and find potential auto refinance offers.
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Cancel any add-ons
Common auto loan add-ons include guaranteed asset protection (GAP) waivers, service contracts or extended warranties, tire and wheel warranties and more — you may have agreed to these when you bought your car without understanding the full cost. Canceling them will decrease how much you owe on your auto loan, allowing you to pay off your car loan faster.
Who it may be good for. Anyone who has add-ons may be able to cancel them. The less you owe, the less you pay.
How to do it. Check your car contract, call your lender or call the dealership to see if any add-ons are listed on your paperwork. If there are any, find out what they are and consider canceling them to get a prorated return. You may need to fill out some paperwork to officially cancel the add-ons, but a few hundred dollars may be worth it.
Special note. If your car has a history of needing repairs, take that into consideration before deciding to cancel an extended warranty. If you are underwater on your car loan, think carefully before you cancel GAP, which is made to protect upside-down borrowers.
Make payments every two weeks
Instead of paying once a month, take your existing car payment and split it in half. Paying every two weeks means your loan balance is continually decreasing, which has the effect of paying less interest over the course of the loan.
Why it can be good. This is a way to essentially make an extra payment without forking over extra money.
Who it can be good for. By doing this, you’re not paying any more than you normally would, but it has the effect of making an extra payment a year, so it may be especially good for someone on a tight budget.
How to do it. Check with the lender to be sure you won’t run into any prepayment penalties. If not, make a half payment every two weeks instead of one full payment each month. You could automate your checking account to send the payment, or give permission to the lender to automatically pull the payment.
How to pay off your car faster with the most bang for your buck
Have extra cash to put toward your auto loan? While the methods above are good, the fastest way to pay off your car is to increase the amount you’re spending. Almost all of these tips involve making extra payments to the principal, the amount you owe on the car not including interest. But first check with your lender that you will not be penalized or charged a fee for prepaying your loan.
Make extra payments to the principal
Why it can be good. Auto loans have simple interest, which means that for every dollar you put toward the principal, you pay exponentially less interest to the lender.
Who it can be good for. Anyone who has an auto loan from a lender who doesn’t penalize early payoff or payments to principal.
How to do it. Call the lender and ask how you can make extra payments to the principal only. You should do this because extra payments not to the principal means you’re paying interest — all you’re doing is giving the bank money early. If you make payments to the principal, you’re not paying as much in interest, which is very good.
Round up your car payment
If you find it difficult to save money or you don’t have quite enough cash to make a whole extra payment, check out this round-up method.
Why it can be good. You could pay off your auto loan early without changing how often you make your payments.
Who it can be good for. If you have a hard time saving money, this is a good way to do so.
How to do it. If the lender will not charge a prepayment penalty, you have nothing to lose by doing this and you can do it in two ways:
- Simply round up your monthly payment. For example, if your monthly payment is $350, round up and pay an even $400.
- Use a money savings app, such as Acorns, to round up what you pay on all of your purchases to the nearest dollar and then pay that money to the auto loan. For example, if you got gas for $15.30, the app would round the charge up to $16 and $0.70 could go into your savings account. A little goes a long way and by the end of the month, you may have $50 you could put toward your auto loan.
Attack other debts: avalanche vs. snowball
We’re not talking about the weather; these are two popular methods used to pay off debts faster. The avalanche method prioritizes paying off high-interest debt first. The snowball method involves paying off your debts starting with the lowest amounts. You can read about more debt payoff methods here.
Why it can be good. These are methods that could help you pay off all your debts, not just your car loan.
Who it can be good for. If you have multiple loans or debts, these methods may help you organize them and pay them off.
Snowball method: how to do it. This is a three-step pattern that should allow you to “snowball” your money to pay off your car loan faster.
- Look at your loans and rank them from lowest to highest.
- Then focus on that smallest loan, paying it off as quickly as you can with any extra cash available while making minimum payments on your other debt.
- Once it’s paid off, congratulations! You no longer have that payment to make. Choose another loan and repeat the process, using the money you would have paid on the loan you paid off.
Avalanche method:how to do it. This method prioritizes debt with the highest APR. For example, if you’re paying a higher interest rate on credit card debt than your car loan, you may be better off using any extra cash to pay that down first.
- Look at your loans and rank them from highest APR to lowest.
- Determine how much extra cash you can put toward the debt with the highest interest while making minimum payments on your other debt.
- Once it’s paid off, roll the money you were using to pay down that debt into the next one.
Utilize any windfalls
Regular extra payments may not always be realistic for your budget, but if you get any money outside of your budget that you didn’t count on, using that money as one-time extra payment toward the principal could really help.
Why it can be good. Any “windfalls” you have, such as a tax return, a refund, a bonus, a big tip or a pay raise, can be put toward the principal on your auto loan.
Who it can be good for. If you were not counting on the windfall, the extra money you got is just that — extra money. By using it as a payment to principal on your auto loan, you’ll save more money because the less you owe, the less interest you’ll pay.
How to do it. It might take some self-control, but use the windfall cash to pay the auto loan. The sooner you’ll pay it off, the more money you’ll have later to spend on things you’ll enjoy.
Make extra income
If your regular paycheck isn’t able to stretch any further, consider a side hustle and put the earnings toward your auto loan.
Why it can be good. A part-time job a few hours a week could add up to enough cash to make a significant dent in what you owe.
Who it can be good for. Anyone with some extra free time may be able to find a part-time job, temp work, freelance assignment or other gig.
How to do it. Depending on what you’re willing and able to do, you could sign up at a temporary work agency, look on job sites and/or talk to people you know about any job opportunities. Just remember to spend the money you make on paying off the principal of the auto loan. You can check out this guide to monetizing a hobby.
Remove extra expenses
What are you willing to cut out of your budget or give up to pay off your car loan faster? Again, every bit helps, if the extra cash goes toward the principal of your auto loan.
Why it can be good. If you aren’t willing or able to make more income, spending less can be an equally good option and, as a bonus, you can keep doing it even after your car is paid off and save the money.
Who it can be good for. Practically anyone could do this.
How to do it. Take a look at your credit card statement or write down what you buy so you can see your spending habits in black and white. Then, decide what you could cut out or possibly get a better deal on — it might add up to more than you think. Maybe you could eat out once a week instead of every day. Maybe you could find cheaper auto insurance. Then apply that savings to your auto loan principal.