With the current car payment averaging $482 a month, paying off your car loan early is a great idea. Being free of a loan saves money on interest, raises your credit score, and increases monthly cash flow.
Here are some pointers for quickly and efficiently paying off your auto loan:
Automate Your Payment
Payments for most auto loans can be made through auto debit or with bill payment through your bank. Having payments sent automatically means no chance of spending a paycheck before your car payment is due. Automation also means never racking up late fees or extra interest if you’re busy and forget to schedule or mail the payment ahead of the due date.
Make Extra Payments
If you don’t have a huge chunk of cash to throw at your auto loan, make a few extra payments instead. Send the extra payment right after receiving your paycheck or wait for a windfall like a work bonus or tax return. Even rounding up your payment just a few dollars every month is helpful. Adding a little extra on a regular basis or making one large lump-sum payment over the life of the loan can shave months off the payoff date.
Pay Bi-Weekly Instead of Once a Month
Making bi-weekly payments accelerates auto loan payoff. Paying every other week instead of once a month turns into 24 payments per year instead of 12. Always make sure your auto lender allows this type of payment schedule and that both payments are received before the due dates. You don’t want to defeat the purpose by being hit with fees for not making a payment.
Don’t Skip Payments
Auto lenders may offer the opportunity to skip a monthly payment without penalty. It might seem like a good idea, especially during the holidays or times when higher-than-average expenses exist, but skipping a payment will cost more in interest and add to the life of your loan. It’s better to make the normal payment and cut back in other areas if you need extra cash.
Make Sure to Direct Extra Payments Toward Principal
Just adding extra money to your payment doesn’t necessarily mean it gets applied to the loan balance. Many lenders apply any overage toward interest, leaving the loan balance unchanged.
Check for instructions about making extra principal payments on the payment coupon or online portal. Sometimes lenders might even require two payments with one earmarked for principal reduction. Regardless, taking a bit of time to make sure the extra payment gets to its intended place is worth the effort.
Paying off your auto loan quickly will free up money that can be used for savings, investing, paying off other debt, or taking that vacation you’ve been dreaming about. By following a few of these pointers, you’ll be on your way to owning your car outright in no time.
Kim Parr is an author who writes about ways to save at Eyes on the Dollar.