Paying off your car loan early will save you hundreds of dollars in interest charges, eliminate a monthly expense, and increase your credit score as your rate of debt to income goes down. Plus, you’ll get a real sense of accomplishment knowing that your car is completely yours, free and clear.
1. First do your homework
Review your loan paperwork before you start. Most car loans are simple interest loans. That is, the interest accrues during the life of the loan, so paying it off early will save you a lot of money. In a precomputed interest loan, on the other hand, the interest is charged up front, so while you won’t save in interest, you will still reduce your debt if you eliminate the loan payment. Also confirm that there are no large penalties for paying the loan off early.
2. Find additional income or cut back
Find out how much extra money that you can come up with each month or bimonthly that can be applied to your car loan. Some ideas for finding the extra funds might include giving up one restaurant meal per week, negotiating a better insurance rate and saving the difference, getting a temporary part-time job, canceling an unused gym membership, holding yard sales, cutting coupons, or giving up premium cable channels.
3. Check your current savings
Review all of your current savings and assets and see how close you can get to paying off your loan with the money you already have. If you do have enough to pay the loan in full, you will need to weigh that against not having ready savings that you can access versus eliminating the car loan debt. Remember that you will be saving the cost of the loan payment each month when it is paid off.
4. Apply the additional funds to the principal
Make sure that any money that is applied above your regular monthly payment is applied toward the principal of the loan and not toward the interest. Sometimes you need to direct the bank to do this, otherwise the additional payments will not have as much impact to your loan, and it will take you longer to pay it off. The principal is the amount that you originally borrowed on the loan. With each monthly payment, some money is applied to the principal and some to the interest. Banks sometimes apply all extra payment directly to the interest and not to the principal.
5. Contact the bank for the payoff
When you are close to paying off your car loan, contact the bank for the official payoff amount. Because of interest that is applied to your loan, when you pay off your loan determines how much you will need to pay. The sooner the payoff, the less the cost. Once you have that amount, pay it immediately through a check in the mail or electronic payment. The bank will then send you the title for your car. Congratulations!