So you have done your research. You have been to the car dealership to buy your new car. You got the best deal and the lowest interest rate. You have driven your new car home. Now, you could continue to pay off your loan in the time you have arranged, whether it is a 60 month loan or a 48 month. But if you don’t want to pay all of that interest, you could pay your car loan off early. But where do you start? First and foremost, make sure you will not incur any prepay off penalties.
In addition to saving you money on your loan, paying off your loan sooner also helps your credit score. Credit scores are based on many factors but it also includes what your debt is. So when you add a $20,000 loan to your credit, your credit score can drop by 15-20 points even without missing a payment.
One simple way to pay off your loan early without feeling the larger payments, is to round up your payments. If your payments are $372, round up to $400. The amount is small enough that you don’t really feel it, but adding that small amount can help reduce the amount of interest you pay overall.
Instead of paying monthly, make bi-weekly payments. While you are still making the same monthly payment overall, by paying bi-weekly, you are lowering the overall principle, which means each day, you are being charged less interest. It also comes out to about an extra payment per year, which can pay off your loan 5 months early.
Some lenders give you the option to skip a payment. Most people take advantage of this leading up to Christmas because they need the extra money in their pocket. Doing this, however, will increase the life of your loan. Do this every year of the loan and you have increased that loan by up to 6 months. That adds up a lot in interest.Yum