Paying off your car loan early is not only a smart way to build your credit score; it helps you potentially save hundreds of dollars on the final amount you would pay in interest.
But you may want to read the loan contract first before paying down on the debt to avoid risking getting fined for early payments. Some financial institutions include a penalty for paying off the loan early as protection against loss of income they anticipated over the term of the car loan.
That said, here are 5 ways to pay off your next car loan quickly.
Understand your credit score
Your credit score will play a crucial role in whether your car dealership offers you the best loan terms or you have to pay high interests on the car loan.
Usually, dealerships will promote the best interest rates to attract buyers. However, what they are not telling you is that the low or zero interest car loans are only for people with perfect credit scores.
Individuals with below-average scores are deemed risky and hence made to pay high interest rates. Sometimes, as high as 10 per cent or more.
So, when you understand your credit score, for example a 750 FICO score, you are in a better position to negotiate the loan terms. However, if your credit score is below average, you may need to shop around and compare rates from several banks to be sure you are getting the best deal possible.
Know the exact amount you have to pay on your loan.
Now, this includes everything – the principal, interests, associated loan processing charges, and potential penalty for paying down the loan early.
Having a complete picture of what the car loan will cost you will enable you to plan your finances accordingly.
Once, you know the cost of the loan, the next step is to figure out how much you will save by paying the debt early. Plugin the lump sum into a loan calculator – there are several free online loan calculators you can use for this – to see the exact dollar amount you will save.
Then run a cost-benefit analysis. Compare the potential savings with the penalty for early payoff. Will you come out ahead when you pay off your loan early?
You will also, need to decide how you are going to make the payments. Will paying one lump sum at once work for you? or do you need to spread the payments, say two times in a month? Or is simply increasing your monthly payment convenient for you?
Of course, the strategy you decide to use will largely depend on the amount of money you can conveniently pay.
Make a down payment
Sure, it feels satisfying to drive out of the lot with your dream car without putting a cent down. Interestingly, many dealerships are happy to let you take possession of the vehicle without making any down payment, especially if you have an excellent credit score.
But, regardless of how tempting the idea is, strive to always put at least 20 percent down for the new car. This way, you only have a smaller amount to payoff which also leads to less payment on interests.
Make a budget and cut back on excesses
One smart financial move you can make to free up cash to channel towards paying off the car loan is to take a look at your spending and cut down on items you can go without.
You can work with a financial planning service professional to create a detailed budgeting plan that suits your lifestyle, this way, you are able to cut back on frivolous spending without sacrificing your standard of living.
For example, if you always eat out ever day, consider making your meals at home. You will be surprised at how much you can save just by doing this.
Consider extra sources of income
However, if you cutting down on your favourite eat-outs is something you don’t want to do, consider making extra money on the side.
Thankfully, there are several side hustles you can do to earn a couple of extra bucks that will go into paying off the car loan.
Also, consider turning the car into an income earning asset. You can join ride-sharing platforms and make the runs during your free time. Put some advertisement on your car, and or make deliveries. There are plenty of options available.
Image Pexels License CCO
