By Andy Nathan
I remember the exact day I paid off my Honda Civic. Although the payment was only $270 per month, I felt a strong sense of freedom—like a whole new world of opportunity opened up to me.
For the past seven years, I have been very fortunate to be able to use that money to spend on retirement, savings, and other life obligations. Plus, owning my car free and clear means I get something back when I decide to trade in the car in the future.
If you want to experience the financial freedom I’m experiencing -- as we observe Financial Literacy Month in April -- and you’re serious about paying off your car loan, then you need a strategy in place to pay it off faster.
7 Ways to Pay off Your Car Loan Faster
1. Bi-Weekly Payments
Instead of making monthly payments, try paying bi-weekly. This strategy is common in real estate when a homeowner pays off their 30-year mortgage in 22 years. You can do the same simply by paying every other week on your car, so you can pay off the car loan earlier.
2. Refinance Your Car Loan
Most car buyers get their auto loan through the dealership. However, by shopping around for a better rate, you could save money on your payments, so you can use the extra money to pay down your loan.
3. Simple Interest Auto Loans
Are you thinking about refinancing your car loan? Do you need the initial loan to purchase the car? Either way, you might want to consider a simple interest auto loan. A simple interest loan allows you to pay the interest based on the amount of principle left.
Therefore, if you start with a $10,000 loan and pay off $2,000, you only pay interest on the remaining $8,000. This is similar to how credit cards operate. The benefit of this model is that the more you pay, the less interest you owe.
If you are looking to pay down your car faster, then you want to spend more time paying down the principal loan amount then interest that goes to the bank. A simple interest auto loan helps you accomplish this goal.
4. Round up Your Loan Payments
Let’s say your car loan is $205 per month. If you round up your car payment to $250 then you pay an extra $45/month towards the principal of the car. After 12 months, you stashed away the equivalent of 2 and a half extra car payments towards paying off your car loan.
After three years, you already cut 6 months off your payment.
5. Savings Accounts
One way financially savvy people pay off their car faster is to use their savings. While you should not take your entire savings to pay off a car because you need to have money for emergencies, you can spend less money on interest and potentially pay off the car immediately.
6. Tax Refunds, Bonuses, and Raises
Similar to savings, you can use tax refunds, bonuses, and pay raises to pay off your car loan faster. The beauty is you are using income you don’t need to pay your regular bills. Therefore, you will not miss the money to pay for your car loan.
This method works great if you get pay raises on an annual basis. If your expenses are mostly fixed, then you can focus on paying off your car faster without having any financial difficulty.
7. Extra Gigs
If you already work a full-time job or you are self-employed, you can take on extra gigs like drive Lyft and Uber. Be careful to get the right drivers insurance if you decide to make money with a rideshare app.
Another option is you could become an affiliate marketer, which lets you earn a commission for marketing another person’s or company’s products. With that, you can earn money to help you pay down your car faster.
'Should I Pay off My Car Loan Faster?'
Paying off your car loan faster not only offers measurable financial benefits, such as reducing the amount of interest you would normally have to pay. It gives you peace of mind. Imagine what you could do with the extra money you have leftover if you paid your car loan off early?
You could boost your savings, travel, launch that business idea or put the money towards retirement. Paying off your car loan is well worth it in the long-run!