According to a 2019 study by Experian, 85.4% of vehicle purchases are financed through a loan or lease. With the average interest rate for auto loans at 5.27% for 60-month terms, most consumers will end up paying thousands on top of the original asking price. The best way to save on auto loan interest is to pay everything off early.
First and foremost, it’s important to make sure there are no prepayment penalties associated with your auto loan. Prepayment penalties guarantee interest income for the lender no matter when you pay off your loan, so confirm that you can make additional payments without it costing you. Truliant auto loans, for instance, feature no prepayment penalties.
Here are some simple strategies that you can use to pay down your loan before the end of the term.
Ways You Can Pay Off Your Car Loan Early
Make a Single Big Payment Every Year
If you want to stick to the minimum installments throughout the year, supplement them with at least one big extra payment. Many people make an extra payment or two during the first few years of the loan to save on interest and pay it off sooner. Common instances include tax refund time, company bonuses or other times when you have additional, disposable income.
Note that if you have high-interest credit card debt, it’s best to put additional money there – you’ll save much more. And, if you’re drowning in credit card debt, Truliant can help with that too. We offer credit union auto loans, personal loans and debt consolidation loans that allow you to pay off your debt at a much lower rate, typically.
Pay More Than the Minimum Payments
You probably agreed to the loan based on the affordability of the minimum payments. However, if you can pay a little more than these standard installments, it's possible that you can pay off car loan early, maybe a year or two earlier. This can save you around a thousand dollars or more in your total auto loan costs.
For example, let's say you took out a $20,000 loan at 5% interest for a 60-month loan term. The minimum payment would be $377 a month, and it would cost you $22,645 at the end of the loan. You'll end up paying $2,645 in interest payments.
Now, what if you decided to pay an extra $122 a month for a total of $499 a month? You'll cover the auto loan in 36 months. The total cost will be $21,579, and you'll end up paying $1,579 in interest payments. So, by paying an extra $122 a month, you'll save $1,066 compared to making the minimum payments for the 60-month term auto loan.
Refinance Your Loan
Many people may not have the best credit score when they take out their car loans. As a result, they're forced to accept the higher auto loan rates. You want to work toward improving your credit score as much as possible. When it does go up, start talking to as many lenders as possible to see if you can refinance. Always check local credit union auto loan rates for a lower interest rate.
Round Up Your Payments
Here's another strategy for ramping up your minimum payments. Consider rounding up your monthly installments to the next $50 or $100. So, if you're supposed to pay $301.25, round it up to $350. If the monthly payment is $347.89, considering rounding up the payment to $400. It doesn't seem like much, but you can pay off car loan early by several months or even up to a year earlier. This is a great way to save money on your auto loan if you're working with a limited monthly budget.
Estimate How Low Your Payments Can Be