How to pay off a car loan faster – 5 quick tips
Whether you are actively car hunting, trying to work out how what car loan you can afford or you are already making regular payments against a loan, you should be thinking how to pay your loan off faster.
If you’re serious about it owning your car quicker (and saving on interest), here are 5 actionable tips on how to start saving now.
Why consider paying off your car loan faster?
The cost of borrowing funds to buy your car is charged as interest on your loan. Some types of loan will charge more interest than others, but in general the longer it takes you to pay off your loan, the more interest you’ll pay. (For a quick guide to different ways of financing your car read this blog post.)
Also, when you buy a car on finance, it may be a condition of the financing that you can’t sell the car until you’ve paid it off. Add to this the fact that cars generally depreciate in value, and you’ve got plenty of good reasons to pay off your car loan faster.
1. Check the small print for early payment penalties
If you’ve financed your car through a car dealership, normally the term of your car loan is fixed. This means there may be prepayment penalties for paying off your loan early. Be sure to check the fine print of your contract to find out if this will apply to you. If you will be subject to a prepayment penalty, grab a calculator and work out whether the penalty will cost more or less than the interest you’re going to save if you pay off your car loan early.
There may also be administration costs or other charges for changing the terms of your car loan. As with the penalty, work out the difference between what you might have to spend and what you’re going to save in interest costs.
2. Make loan payments every two weeks instead of every month
One way to pay off your car finance early is switching from monthly to fortnightly payments. There are 12 months in a year, but there are 26 fortnights. So if you pay half the monthly amount every two weeks, you’ll make the equivalent of 13 months of repayments in a year, meaning you pay back your car loan quicker.
3. Make lump sum payments
Many finance companies and banks will allow you to make lump sum payments on your personal or car loan. Every time you make a lump sum payment, you’re reducing the amount of money that you’re paying interest on. If you can do this as well as making your normal repayments, you’ll pay off your car quicker. A lump sum can be anything from money you have in a savings account to a work bonus or a windfall payment. Be sure to check the terms of your car loan to make sure there’s no penalty for doing this, and talk to your lender if you’re not sure.
4. Increase your car loan repayments
If you’re able, think about increasing your repayments. Even an extra $10 each payment will make a difference. If you’re making fortnightly payments, an extra $10 each fortnight is an extra $260 a year. An extra $20 each fortnight is an extra $520 a year and so on. Every bit helps you pay off your car loan faster.Why consider paying off your car loan faster?
5. Choose the right loan term from the start
When you’re setting up your car loan, think about the term of the loan. The longer a loan term is, the more interest you’ll pay. However this also means the monthly or fortnightly (or weekly) payments will probably be lower. If you want to pay off your car faster and pay less interest, your repayments will be higher, but be realistic about what you can afford. If you’re not sure, talk to your lender – they want to make sure you don’t take on more than you can repay as much as you do!
Check out this calculator for a breakdown of how much interest you’ll pay with different loan terms or repayment amounts.
How can a broker help?
A broker can help you work out what options will work for you both before you take out a loan, and if you’re already paying one off. Give us a call if you want to talk about paying off a car loan faster, setting up car financing that fits your circumstances, or if you have any other questions about financing your car. Get in touch.