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How to Pay Off Your Car Loan More Quickly

How to Pay Off Your Car Loan More Quickly

Debt-free. That’s the dream of many people. However, the road to that destination is likely paved with the need to repay loans.

If this sounds like you — and the debt you want to take an exit ramp from is one or more car loans — this article is a must-read. While not a roadmap to the financial freeway, we’ve piled in loads of helpful info and tips. So, buckle in and let’s get this show on the road!

Loans, Dissected

“Loan” is an everyday word. But do you truly know all the parts of one? Similarly, do you fully understand the ins and outs of repayment?

Just to be on the safe side of the street, here’s a fast-lane review of the elements of a loan and its repayment. Whether you’re a first-time borrower or not, this might be worth a quick scan-through. 

Parts of a Loan & Other Key Terminology

A loan — or, rather, the total price tag of a loan — consists of two main pieces:

  • Principal. This is the lump of money you’re borrowing.
  • Interest. This is the financing fee you’re paying to borrow the principal.

When you’ve finished repaying your loan, you will have paid back the principal plus some sum of interest. This means that if you borrowed $3000 to purchase your vehicle, your total repayment cost will be more than $3000 (i.e., principal + interest = total).

We’ll keep this very high-level, but here are some additional vocab and concepts to be aware of as a borrower. 

  • Interest Rate. This is the percentage of interest you’ll be charged for taking out a loan. Auto loan rates may also be expressed as an annual percentage rate (APR).
  • Down Payment. This is the money (or value of a trade-in car) you put towards the cost of the vehicle you’re buying. It reduces the size of the auto loan you’ll need.
  • Terms & Conditions. These are the details of the loan, such as the length of the loan, repayment schedule, requirements, default and repossession stipulations, and so on.

Before committing to any loan, be sure you completely understand the particulars of the specific loan you’re considering. A loan specialist — like the expert ones at VCU! — can help you make sense of your options and obligations.

Loan Repayment Process

Loan repayment is typically done in equal monthly payments over an extended time horizon according to the terms and conditions of your loan contract.

Most loans are structured so that your payments whittle down the principal of your loan and pay some interest. The interest portion will generally decrease over the life of the loan.

With principal-only loans, 100% of extra payments you make go towards the principal share of your loan. This can help speed up the repayment timeline and reduce the final cost of the loan.

Auto Loan Rates in the US

Car loans in the US are big business, and often equally big burdens for consumers. Check out these stats:

Should You Pay Off Your Car Loan Early?

There’s no one answer to this question. You need to evaluate your personal situation to see if early repayment of your auto loan is a smart choice for you. There are many variables that factor into this decision — like your other financial responsibilities and opportunities, things going on in your life, etc.

That said, you can mull over the possible upsides and downsides of paying your car loan off sooner rather than later.

driving a car with an auto loan

Benefits of Early Loan Repayment

Many of the positives are clear to see. These include:

  • Lower cost of obtaining your car
  • Ensure that you don’t owe more than the value of your car
  • Own the car outright
  • Less debt
  • More money available to use for other things

Potential Negatives to Early Loan Repayment

The drawbacks to early repayment might not be as obvious — but they do exist. Here are some to ponder:

  • Early payback penalties
  • Strain on your budget
  • Forgoing better (more profitable) applications of your money’
  • Temporary dip in credit score

How to Pay Off an Auto Loan Faster

Below are some road-tested tips for putting your loan repayment into turbo gear. For the sake of illustration, let’s say you have a 72-month, 2.5%-interest loan with $376/month payments.

  1. Round up your payment. Bump your payment to $400/mo.
  2. Make more payments. Instead of a single payment per month, do two or more payments (all together totalling more than $376).
  3. Increase payment frequency. Split your monthly payment into two installments of $188, paid every other week.
  4. Make an additional payment each year. Instead of 12 monthly payments per year, do 13. That thirteenth payment should be sizable enough — like $500 — to make major inroads on reducing your loan balance and shortening your repayment time frame.
  5. Use “found” money. Apply gifted money, bonuses, refunds and rebates, income from a side hustle, etc. to your car payments. A birthday check for $100 or putting your 10% raise towards your car loan can go a long distance!
  6. Do a lump sum payment. This simply entails paying the remaining balance of the car loan in one big installment. If you still owe $4,000, you’d send in a payment for $4,000.
  7. Don’t skip a payment. Even if your lender permits it, just try not not. Extending your loan makes it more expensive in the long run.
  8. Shorten your loan duration. Often, longer loans have higher interest rates. Maybe by cutting your loan down to a 60-month loan, you’ll be able to get a lower-than-2.5% interest rate.
  9. Refinance your loan. Shop around to see if you can get more favorable interest rates and terms. This may lower your monthly and total loan cost, enabling you to hasten repayment. If you can drop your payments to $300/month but still pay $376/month — well, you can do the math.
  10. Negotiate! It never hurts to have a conversation with your lender. By engaging with your lender, he or she may be able to suggest ways to pull on the levers of your loan. In this way, you might discover options for better terms, sources of additional money to put towards loan repayment, etc. 

Using one or more of these methods can add up really quickly. So, what may seem like a small tweak in your payback scheme might actually have larger, faster, more compound impact than you’d initially imagine!

Pro tip: Remember to always ask your lender to apply extra payments to the principal of your loan.

Valley Credit Union — Driving Financial Wellness

At VCU, we think you should spend more time cruising the boulevards and open country than worrying about your car loan. That’s why we’re here to help you navigate your auto loan.

We have friendly, knowledgeable loan specialists in-house who can assist you from priming your credit for car buying to car loan pre-approval to auto refinancing. We’ve got the whole stretch of road covered so you can concentrate on enjoying your new vehicle.

Contact us today to see how we can help you manage your car financing trip.

About the Author

 Justin Roberts, Vice President of Lending

Justin Roberts is our Vice President of Lending and has been in the financial industry for over 18 years. He is an Oregon State University Graduate and has just completed Western CUNA Management School. When he is not focused on helping the members at Valley, you will find him coaching his two sons and volunteering his time to help develop the youth in our communities through sports.

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