Most people view a car as a necessary expense, something they have to have to get around, and take on loans to buy one. If you’re one of those who don’t feel comfortable being in debt and having years of making payments looming ahead, you may want to make the extra effort to achieve freedom much sooner by paying your car loan off early.
In this article, we’re going to talk about how you can do that.
Why Pay Off Your Auto Loan Early?
The most obvious reason is to save money. Interest on auto loans can take a significant bite out of your budget and by paying off the loan sooner, you avoid having to pay as much in interest charges.
Also, it’s a great way to free yourself from debt faster. Having a car loan hanging over your head can be stressful and by paying it off sooner, you’ll be able to enjoy the freedom of having one less debt obligation. Plus, with a paid-off loan on your credit report, your credit score will get a boost too!
How Paying Off Your Car Loan Early Could Affect Your Credit Score
Before taking steps to pay off your auto loan faster, make sure you understand how it could affect your credit score. Paying off a loan ahead of schedule can have positive and negative effects on your credit score. It’s important that you weigh the pros and cons before deciding if this is the right move for you.
Positive Effects
When you pay off a car loan ahead of schedule, it shows lenders that you’re responsible with your money and can be trusted to repay debt on time. This can be beneficial when you’re applying for a new loan, as it may give you a better interest rate.
In addition, a paid-off car loan will stay on your credit report for up to 10 years, which can help boost your credit score over time. This is because having a longer credit history can improve your credit score. So, if you’re planning on taking out another loan in the near future, paying off your car loan ahead of schedule could be a wise decision.
Negative Effects
On the other hand, paying off an auto loan early could also have a negative effect on your credit score. This is because when you close an account, it can reduce your available credit amount, which may lead to a decrease in your credit score.
Additionally, if you close an installment loan before its official end date (such as an auto loan), it could also result in a lower credit score. This is because even though you paid off the loan, your credit report may still show that you didn’t make all of your payments on time.
Tips for Paying off Your Auto Loan Faster
Your car doesn’t have to be a financial burden. There are ways you can pay off your auto loan faster and save money in the process. Here are some tips on how to do just that.
Make a Bigger Down Payment
Making a bigger down payment reduces the amount you have to finance, which in turn leads to lower monthly payments and less interest paid.
Make Larger Payments
Each time you make an extra payment towards your loan you are reducing the principal balance. This will, of course, reduce the amount of interest charged as well as shorten the term of the loan.
Make Payments More Frequently
Making payments more frequently helps you reduce the principal balance faster and pay less interest over time. For example, if your normal payment is once a month, consider making bi-weekly or even weekly payments instead. This will help you get out of debt quicker!
Refinance for a Lower Interest Rate
If you can qualify for a lower interest rate, it can make a huge difference in how much you pay over the term of the loan. Shop around to find the best rates and compare offers from multiple lenders.
But don’t use your credit card! While you can even buy a car with a credit card, depending on your credit score, this option won’t save you money. Remember that if you use a credit card to buy a car, you are likely to have to pay an additional fee and will be charged interest on the amount you owe until it’s paid off in full. Therefore, it can be more costly than traditional financing options.
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Consider Switching to a Shorter-Term Loan
Shorter-term loans typically have higher monthly payments but they lead to lower interest charges and help you pay off the loan sooner. Plus, if you decide to switch from a 60-month loan to a 48-month loan, for example, your monthly payment might not increase significantly since you are paying more principal each month.
Use Tax Refunds or Bonus Money to Pay off the Auto Loan in Full
If you’re lucky enough to receive a bonus or tax refund that’s equivalent to the amount of your auto loan, you can use it to pay off the debt in full. That way you won’t have any more payments and will no longer owe anything on the loan.
Automate Your Payments So You Don’t Forget Them
No matter how diligent you are, it’s easy to forget a payment. Setting up automatic payments can help ensure that your payments are always made on time and will help you avoid late fees or any other hassles associated with missed payments.
Final Thoughts
Paying off your auto loan faster takes dedication, sacrifice and hard work but the payoff is worth it in the end. Imagine how good it will feel to have one less debt obligation and begin enjoying more financial freedom! So what are you waiting for? Start taking steps today to pay off your auto loan sooner. You won’t regret it!
