UNITED STATES—Most car loans eventually lead you to pay more than twice what the vehicle was initially worth, but it’s difficult to notice this fact when you’re scrambling to make payments. However, if you make larger or more frequent small payments to your loan, you can limit the amount of interest you pay. To save a significant amount of money, try these early loan pay-off tips.
Round-Up Your Car Payments
The majority of comprehensive car insurance loans in Australia will suggest a payment, but typically the first payment they offer is the lowest they could possibly go. This guarantees that the loan companies receive as much interest from you as possible, so don’t let that happen. Instead, round up your car payments to the nearest $50 to pay your car loan even quicker.
Let’s say you borrowed 20K at a 6% interest rate for 60 months. That leaves you with a monthly payment of $387 and $3,199 paid in total interest. However, if you make your monthly price $400 a month, you’ll pay your loan off 6 months faster than you otherwise would have.
Pay Half Every Two Weeks
While this will amount to minimal savings, it will still amount to something. With a payment made to your car loan every two weeks instead of every month, you’ll end up making 26 half-payments per year instead. This payment structure adds up to 13 total payments a year instead of 12, which will save you at least one monthly payment and a bit of interest.
Make at Least One Large Payment
Making one large payment per year can actually cut your loan’s payment time in half, depending on how much you save in the interim. If we use the same loan from the first section and add an extra $800 payment each year, you’ll save $640 in interest and pay down your loan in 55 months instead of 60. Adding on the rounded-up payments, it will take you 49 months.
Saving up to pay off your car loan may be difficult at first, but if you put away at least $100 per month just for your car loan, you’ll easily make the $800 needed for the lump sum. However, if you add on an extra $100 each month to make it $1600, you can also make a yearly payment.
Make One Extra Payment Per Year
If you’re able to make another yearly payment of $800 a year on top of the already extra $800 payment, you’ll decrease your loan time even further by another 5 months. In the end, you have the potential to save thousands of dollars in interest on top of the luxury of owning your car sooner. However, it will take some extra financial planning and scheduling on your part.
Refinance Your Car Loan
Most insurers will allow you to refinance your car loan to get a new monthly payment and/or pay-off date. Only refinance to get a better deal. Otherwise, you could be left paying more than you bargained for. That’s why it’s important for you to read your loan terms carefully before following through with financing; you don’t want to pay the same principle with higher interest.
At the same time, it may be beneficial for you to refinance your car loan or switch it to a new car after you sell your current vehicle. Some dealerships will let you do this. Again, make sure that your car loan isn’t refinanced with a higher premium or interest rate.
Never Skip a Payment
Never, ever skip a payment if you can help it. Not only will a missed loan payment affect your credit, but it will also lengthen the term of your loan, which will cost you more interest in the end. Resist the urge by putting money away each month that you can’t touch in a savings account.