Debt-free. That’s the dream of many people. However, the road to that destination is often 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 financial freedom, we’ve packed loads of helpful info and tips to get you on the right path. So, let’s dive into how to pay off your car faster and set you on the journey to a debt-free ride!
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 financial road, here’s a quick review of the elements of a loan and its repayment. Whether you’re a first-time borrower or not, this might be worth a glance.
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 sum 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 amount of interest. For example, if you borrowed $3000 to purchase a vehicle, your total repayment cost will be more than $3000 (i.e., principal + interest = total).
Here are some additional terms and concepts to know 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. It reduces the amount 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, and consequences of default or repossession.
Before committing to any loan, make sure you completely understand the specifics of the loan you’re considering. A loan specialist — like the expert ones at Valley Credit Union (VCU)! — can help you make sense of your options and obligations and how to pay off your car loan faster.
Loan Repayment Process
Loan repayment is typically done in equal monthly payments over time, as outlined in your loan’s terms and conditions.
Most loans are structured so that your payments gradually reduce the principal of your loan while paying some interest. The interest portion will generally decrease over the life of the loan.
For principal-only loans, 100% of extra payments go towards the principal, helping speed up repayment and reducing the loan’s overall cost. Always ask your lender to apply extra payments to the principal — it’s one of the best ways to pay off your car loan faster.
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-size-fits-all answer to this question. You need to evaluate your personal situation to determine if early repayment of your auto loan is a smart choice for you. Consider the best way to pay off your car loan and your other financial responsibilities and opportunities before making this decision.
That said, you can mull over the possible upsides and downsides of paying your car loan off sooner rather than later.
Benefits of Early Loan Repayment
Many of the positives are clear to see. These include:
- Lower cost of obtaining your car
- Ensuring that you don’t owe more than the car’s value
- Owning the car outright
- Less debt
- More money available for other goals
Potential Negatives to Early Loan Repayment
However, the drawbacks to early repayment might not be as obvious. Consider these:
- A potential prepayment penalty
- Strain on your budget
- Forgoing better (more profitable) applications of your money
- Temporary dip in credit score
How to Pay Off Your Car Loan Faster
Here are some road-tested tips for accelerating your loan repayment. To illustrate our example, let’s consider you have a 72-month, 2.5%-interest loan with $376/month payments.
- Round up your payment: Bump your payment to $400/month.
- Make more payments: Split your monthly payment into biweekly payments (all together totalling more than $376).
- 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. You can use your tax refund or bonus for an extra payment.
- Use extra money: Apply gifted money, bonuses, refunds and rebates, side hustle income — basically any extra cash, to your car payments. A birthday check for $100 or putting your 10% raise towards your car loan can go far!
- Make a lump sum payment: Pay off the remaining balance in one go if possible.
- Don’t skip payments: Even if your lender permits it, do your best to avoid it. Extending your loan makes it more expensive in the long run.
- Shorten your loan duration: Often, longer loans have higher interest rates. By cutting your loan down to a shorter term, you may be able to get a lower interest rate.
- Refinance your loan: Shop around to see if you can get more favorable interest rates and terms. If you lower your payments but continue paying the old loan amount, you’ll repay faster. You may also want to consider the benefits of refinancing your car through a credit union.
- Negotiate: It never hurts to have a conversation with your lender. By engaging with your lender, they may be able to suggest ways to adjust 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 a larger, faster, more compound impact than you’d initially imagine!
Pro tip: Always ensure your lender applies extra payments directly to the principal.
Valley Credit Union — Driving Financial Wellness
At VCU, we think you should spend more time enjoying the drive and less time worrying about your car loan. That’s why we’re here to help you navigate your auto loan with confidence.
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 journey and get you closer to financial freedom. Let’s drive toward your goals together!
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.