How to Pay Off an Auto Loan Early

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A mother is in the drivers seat of her car. Two children are in the back seat.
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Paying off a car loan early can give your budget some breathing room. If you don't want to be burdened any longer than needed, there are several strategies you can use to pay off your car loan sooner.

Refinance to a Lower Interest Rate

Has your credit score improved since you purchased your car? If it has, refinancing to a lower rate is an effective way to pay off your car loan early. By lowering your interest rate, you'll reduce the monthly payment—and if you pay more than the monthly payment, you’ll be well on your way to reducing your debt.

Before you refinance, you should:

  • Know your interest rate
  • Check for a lower rate at a credit union, bank, or online
  • Finance for a lower rate and shorter term

Reducing your interest rate means you will pay less overall, but it doesn't mean you'll pay it off sooner if you choose a longer loan term.

For example, if you have three years left on your car loan with a 5% interest rate and refinance to a five-year loan with a 2.5% interest rate, you just extended your loan two years unless you choose to pay the loan off early. This does lower your payment and put money in your pocket to spend on other, higher-interest debt. If you extend your car loan term, consider increasing your monthly payment amount to pay it off at a faster pace.

If you have a lump sum to pay off your car loan early, check with your lender to find out if there are any prepayment penalties and what those penalties are.

Pay Your Car Loan Biweekly

Take your monthly car payment, divide it by two, and make that payment amount every two weeks. If you pay every two weeks, you will make 50% of your payment 26 times as opposed to a typical 12 payments a year. Essentially, you'll make one extra payment each year.

Another benefit to biweekly payments is that you may pay less interest over the course of the loan, depending on how your loan company credits your payments. Paying every two weeks means your balance is continually decreasing, which could lessen the amount of interest charged against your remaining balance versus paying once a month.

Doing this step alone won’t help you pay off your loan very quickly, but every little bit helps.

Pay More on Your Extra Pay Periods

Depending on your pay schedule, you may have an extra paycheck a few times per year. For example, if you get paid weekly, you usually get four paychecks per month. Four months every year, you receive five paychecks.

If you get paid biweekly, you typically bring home two paychecks a month. Two months a year, you'll get paid three times in a month. These extra paychecks are perfect to put toward your car loan.

This applies any time you receive "extra" or unexpected money. For example, pay raises are an excellent opportunity to pay down debt. Pay raises add a little extra to your paycheck each month, and you can add that extra to your car loan payments. Chances are that you won't miss it.

Make Snowball Debt Payments

This method applies to all debt, car loan payments included. Take your debt with the lowest balance and put any extra money in your budget toward that debt. Then take the money you were paying on that debt and apply it to the debt with the next lowest balance. Once that one is paid off, use the full amount you were paying towards your next debt until all of your debt is gone.

Snowball debt payments work beautifully. Some people prefer to start with the highest interest debt instead of the lowest balance. Either way, it will work to pay off your debt as long as you aren't adding to your debt while you're trying to pay it off.

Shop for a Lower Car Insurance Rate

If you haven't shopped around for cheaper car insurance in the past couple years, it's time to review your policy and get quotes from other carriers.

If you're happy with your current company, talk to your insurance agent about different strategies to lower your car insurance premium. Review all available discounts and evaluate the possibility of increasing your deductibles and/or lowering your coverage. Keep in mind that changing those factors will lower your premium, but if there's an incident, you'll be responsible for more out-of-pocket costs. Take a balanced approach.

If you're open to change, get quotes from two or three other insurance carriers. Try your best to get quotes on the same coverage from each company so it's easy to comparison shop.

Consider working with an independent agent to speed up the process of getting quotes and lowering your costs. Independent agents contract with multiple insurance companies.