Guest Post: How To Kill Your Auto Loan As Fast As Possible

Today I wanted to share a guest post by a fellow early retirement blogger who despises car loans and has some tips to pay yours off early (and, it turns out, we live in the same city!).  Enjoy!

How to Kill Your Auto Loan as Fast as Possible

by Dan at DINKS.co

A lot of Americans have cars and auto loans; in fact, according to the Federal Reserve, over 107 million adults in the United States had one in 2017. That adds up to almost 43% of Americans over 18. If there’s one thing that auto loan borrowers have in common, it’s a desire to get their loan paid off as quickly as possible (who knew??) which is something we can relate to.

Most cars depreciate and lose value over time (a bit too soon sadly). No matter how shiny the car or truck, it loses value the minute you drive it off the dealer’s lot. If you aren’t paying your loan down at least as fast as the depreciation rate, you’ll very quickly end up being ‘upside down’—owing more on the loan than the vehicle is worth. That’s not a financially good place to be (profound statement).

The best way to deal with a car loan is to get rid of it as quickly as possible. Duh! There are several ways to do that; some involve a bit of prep work before even getting the loan, but if you’ve already signed the paperwork and are trying to make payments, you still have options. At any rate, here are a few tips during two crucial auto loan stages that will help pay off your wheels all by yourself.

Set Yourself Up for Success Before the Loan

Before you sign any loan paperwork, there are a few things you can do to ensure that your loan will be paid down quickly. If you already own a vehicle, you could trade it in at the dealer for a discount on the price of your new car. Not all dealers do this, so you’ll want to check with the dealer you’re thinking of doing business with before you visit their lot. You should also double make sure you can’t get a better price selling it used to another buyer in need of a car.

Excluding the trade in value of a car, you can make a larger down payment out of your pocket when you first get the loan. It may take longer for you to have enough saved up, but the bigger your down payment, the less money you’ll need to borrow—and the smaller loan you’ll end up with.  Smaller loans mean less to pay off, especially in interest payments, and you’ll own your vehicle free and clear a lot sooner.

While it might not be the most pleasant idea, you can also buy a smaller or less expensive car. Your down payment and trade-in will be worth more relatively-speaking, and if you pay it off quickly, then you can always trade it in for an even better vehicle sooner.

After the Loan

If you already have an auto loan, you’re certainly not out of options. There are several things you can do to get your loan paid down faster. Regardless of what your loan’s term or monthly payment amount is, you can split your payment into two biweekly payments.

This is a trick that taken from the mortgage book. By making biweekly payments instead of monthly payments, you are paying down the balance faster. Loans accrue interest on the balance, and so every payment decreases the amount of interest going onto your loan.

In addition, making biweekly payments ends up counting as an extra payment at the end of the year! Here’s how it works; with a standard monthly payment, you’ll make 12 total payments in a year. If you pay half of your monthly payment every two weeks, you’ll end up making 26 ‘half-payments’—totaling 13 monthly payments instead of 12. You’re likely save money in interest by following this strategy.

Another simple way to help your loan along is to round up your payment amount. If your payment is $329.42, for instance, pay $330. You could even bump up your payment amount to $350, sending even more money to the balance and cutting down accruing interest. If you can, use your tax refund check, any work bonuses, or even monetary gifts to help pay off your loan as well.

Rounding up payments themselves is a great way to fast track repayment; however, there’s another way to round and pay down debt quickly. There are several apps such as qoins and ChangEd that allow you round up to whole numbers on your daily purchases, putting that additional change towards debt. This is just another small way to cut away at your outstanding loan balance.

If interest rates have dropped since you first got your loan, refinancing might be a good idea. By refinancing your auto loan, you obtain a new loan at a new interest rate, and then uses the proceeds from the new loan to pay off the old one. In most cases, refinancing is done for one of two reasons—to drop the interest rate, or to decrease the monthly payment amount.

Don’t refinance for a lower monthly payment, however; you’ll take even longer to pay off the loan. Remember, the whole point of this article is to pay down your loan sooner. Dropping the monthly payment requires you to extend the repayment term, and you’ll only take longer to pay it down in the end. Only refinance if it’ll drop your interest rate. If you can get a lower rate over the same repayment period (or an even shorter one), then you’ll stand to save some money and expedite repayment in the process.

Conclusion

Auto loans are common—but just because you signed up for a 3- or 5-year term doesn’t mean you have to take that long to pay it off. With the tips above, you could be paying off your loan much faster—and soon that money can go toward something else, like a vacation fund. Paying off an auto loan is a great feeling. After going through the obligation to finance a car all by yourself, you’re left with the reward of total freedom.


Matt – When I bought a car, I didn’t do much planning ahead.  I financed through the dealership and later refinanced through my bank and paid I think $200 to do so.  Even if I didn’t get preapproved by my bank before I bought the car, I probably would have been better off just keeping the higher interest rate and saving the $200.  Dan is absolutely right about adding a little extra to your monthly payments.  If you can swing $25-50 a month extra, you can cover a couple extra payments a year, which adds up to a year less on your loan.  

It’s also important to consider the car you’re buying and what you plan to do with it.  It’s too common to see people trade in their car after a couple of years and roll their old loan into a new one, content with making monthly payments for life.  The problem with this is that cars deprecate so quickly that unless you’re making a lot more than the minimum payment, you owe more than the car is worth. 

And the folks who make a lot more than minimum payments are the ones who understand that once that car is paid off they can use their freed up cash flow for something more productive.  And they’ll keep that car as long as they can.  So the typical person is making minimum payments and is under water.  Then they trade it in and just add the debt to the next loan.  

The reality is that cars are pretty awesome nowadays.  They can easily last for 10-15 years and 200,000 miles and have a lot of capabilities.  My point with this is that right now, it’s not necessarily a terrible decision to buy a car on credit.  Interest rates are still low, and if you buy only as much car as you need – which for most people a small sedan or hatchback and not a $45k pickup truck or SUV – you can have a newer car that will last you for at least the next decade AND have the luxury of driving a more modern vehicle without having to live in it.


Image by Becris at FreeDigitalPhotos.net

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